Current account an important choice for new graduates
Recent graduates may find that despite entering one of the toughest markets in history, they can still take control of their finances by focusing on their choice of current account.
Graduating university and starting a job for the first time tends to lead to a change in spending habits. In addition, the average student has debt in the five figures before even starting to take in a salary.
Choosing an account with high interest free overdraft may help in the repayment of loans or credit card bills. Banks will allow borrowing of up to several thousand pounds at no cost during the crucial first years after graduation.
This can create some much needed breathing room for former students as they chip away at their debt and try to put aside money for the future.
Louis Kaszczak, head of Moneyfacts.co.uk says when choosing a graduate current account the first step is making a budget.
By determining what's coming in and going out with a programme like Excel, graduates can see just how much they have to put towards their debt each month. It may be a time when income is higher than ever but additional accommodation and travel expenses could also factor in.
"In order to get your student debt paid off, the first thing you need to do is to work out exactly how much you owe. Then you can work out a monthly budget and decide how much you can afford to repay towards your debts," said Mr Kaszczak.
"As with any debt, paying off those charging the highest rates of interest first is key. The average rate payable on a credit card is 18.1 per cent, while the interest payable on your student loan is much lower (in line with inflation)."
Graduates also do not need to feel any obligation to stay with their current student account.
"Shopping around is key to ensure you don't end up paying more interest than you need to," Mr Kaszczak said.
Different banks offer varying levels of interest free overdrafts. Graduates should be wary a bank balance dipping below the allotted interest free amount can result in stiff penalties as interest rates average in the double-digits under those conditions.
Authorised borrowing beyond the interest free rate is preferable to unauthorised borrowing, whose pay back rate at Abbey Bank is over 26 per cent.
"In the first year, the level of interest-free overdraft on a graduate account ranges from £1,000 up to £3,000. Additional authorised borrowing is typically charged at between 9.9 per cent EAR (equivalent annual rate) and 19.9 per cent," Mr Kaszczak explained.
The highest first year overdraft allowance on the market is part of Barclay's Bank Graduate Additions account, which permits £3,000 in interest free overdrafts, declining in subsequent years.
Though it's the only account to come with a fee (£5 each month), Mr Kaszczak says that should not be a deterrent.
"Many may discount the Barclays Bank Graduate Additions account because of the £5 monthly fee, but with an additional £1,000 interest-free overdraft in the first year compared to other non fee paying accounts it is worth considering."
In the first year, Abbey, Lloyds TSB, NatWest and Royal Bank of Scotland (RBS) all offer £2,000 interest free overdraft. Authorised overdraft rates are 9.9, 16.8, 17.81 and 9.9 per cent respectively.
Each graduate account comes with specialist advice services to help counsel graduates on how to handle their finances. This service can be taken advantage of when planning to repay debts or make a big purchase such as a house or car.
Certain accounts such as Barclay's Graduate Additions account and RBS's Graduate Royalties account also come with additional services. These may include shopping discounts, special rates on loans and mortgages or mobile insurance.
"Many accounts offer incentives in order to attract your business, but they should be a bonus and not the reason for selecting the account," said Mr Kaszczak.
The extra services available can just be teasers that leave graduates vulnerable after their benefits dry up. It's possible the higher cost of overdraft or interest may cost more than the free offers save.
Graduates should focus on repaying debts. The account that best fits their circumstances will be the one that is most conducive to preparing for the future.
Mr Kaszczak concluded: "Graduates are key targets for banks, as many will go on to well paid jobs and will likely buy other financial products such as mortgages from them in future. If you do start struggling with your debt, don't bury your head in the sand. Instead, head into your local branch where advisers will help you get your finances in order."
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