Money Insider: Pick interest-free overdraft over freebies

With A-level results due to be unveiled this week, students will soon be busy sorting their university arrangements for the autumn, and that includes opening a bank account.

The banks are keen to attract the potential high flyers of tomorrow with one eye on signing them up for their profitable insurance, pension and mortgage products in later life.

The big high street providers have released details of their student account packages for this year, and as usual, are offering an array of incentives in an effort to win the custom of the new intake.

However, the most important element of a student bank account for most people will be the ability to borrow as much money as cheaply as possible. So even though free music downloads, gadgets or restaurant discount cards may sound tempting, the following numbers should convince you to give the gimmicks a wide berth.

If you can borrow an additional £1,000 interest free, you would save around £100 every year compared with a student bank account that was to charge you interest at a rate of 9.9 per cent, such as with Co-op Bank. The saving could be much more if you compare the charges from Barclays, where students will pay £1 per day for agreed borrowing over £2,000.

That adds up to considerable saving over the course of your time at college and far outweighs the value of any incentives on offer.

Halifax and HSBC offer the largest interest-free overdraft limits of up to £3,000, but both are subject to application and not granted automatically.

Additionally, be aware that some of the banks will limit how much you are able to borrow each term, particularly in the first year.

Whichever bank you choose, make sure you don't go over your interest-free limit as you could end up paying hefty charges which you can ill-afford on a student budget.

The only possible exception to the rule regarding incentives comes from Santander.

All new accounts are eligible for a free four-year 16-25 railcard, a benefit that could prove a big money saver if you plan to use the train frequently.

The railcard cuts student rail fares by a third, but bear in mind the maximum interest-free overdraft available from Santander is £2,000.

Money tips for students

Sign up for your student bank account before you get to college and avoid the queues, you can open the account at the branch where you live.

If there are a couple of accounts that meet your needs, check which one has a branch on campus – it's easier and cheaper to be able to pop in to talk to someone if you have a query.

Try to avoid the urge to sign up for a student credit card, but if you really must have one make sure it is only for emergencies.

As well as studying, university is also somewhere you will pick up some life skills, including managing your money and trying to live within a budget.

Budgeting may sound dull, but it has got to be better than running out of cash halfway through term and having to go cap-in-hand to your parents to bail you out.

If your money isn't going as far as you'd thought when you're at college and you're in danger of going over your limit, speak to your bank – if there is a branch on campus you'll usually be able to speak to a student specialist who can help you out.

Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk