The top five student bank accounts for 2012

Choosing the right student bank account is vital if you are to manage your finances in the most effective way as a student.

With tuition fees adding to the pressure on student’s wallets, it is even more vital to make the most of your money and to borrow or use an overdraft in the most effective way.

That is why as a student you should pay most attention to choosing a student bank account with the cheapest borrowing facilities. Making the right choice could save you hundreds of pounds over the course of your studies.

This works in two ways. Firstly, if you think you will go overdrawn but will be able to stay within the agreed overdraft limit of your current account, then choosing the account with the highest interest-free overdraft is vital.

On the other hand if you think you are likely to breach any agreed interest-free overdraft limit, then choosing an account with the lowest interest rate for unarranged borrowing should be your priority.

There is nothing wrong with being in debt as a student, but why pay for it if you can avoid it?

Interest-free overdrafts

Even with the best intentions in the world, most students will become overdrawn early in their studies and stay overdrawn for the duration of their course, and, most likely a year or two after graduation.

This is why the account with the highest interest-free overdraft is usually the best choice. It means you can borrow for nothing, a rare opportunity and one that is usually only available to students as banks try and get you as a customer for life.

Most student bank accounts won’t let you borrow the full £3,000 straight away, in the first year but the interest-free overdraft will be tiered to rise gradually to £3,000 through the duration of the course.

Unarranged borrowing

The best way to manage your finances as a student is to choose an interest-free overdraft and not go over it.

However, sometimes it may be unavoidable. If you have an unexpected expense that is going to take you over your agreed limit, it is vital not to bury your head in the sand and hope it will go away. Contact your bank, explain the situation and try and negotiate some more credit at as low a cost as possible.

If you think that you will breach your agreed borrowing limit then it makes sense to select a student bank account in the first place that has the lowest possible interest charges on unarranged borrowing.

As a rough guide if your average overdraft balance is £1,500 more than agreed for the entire month and you are charged interest at a rate of 20 per cent (about the average rate for a student bank account), you will pay roughly £25 a month or £300 a year a year in interest.

Other benefits

Other benefits such as free railcards, travel insurance, laptop discounts or even cash, whilst useful in themselves are not as important as securing the highest possible interest-free overdraft. You will be doing yourself a huge financial favour if this is your priority.

Kevin Mountford, head of banking at MoneySupermarket, said: "Most providers offer a number of benefits. Although these freebies may be useful, the value of them will be low compared to interest-free overdrafts, which should be the key focus for those considering a student account this summer."

The top five student bank accounts

Last time I compiled this list, Halifax had the top student bank account simply because it offered a £3,000 interest-free overdraft, £1,000 more than its nearest rivals.

This year HSBC also offers an interest-free overdraft of £3,000 and because of the other benefits associated with the account it takes over the top spot.

So, starting from the top, here are the best five student bank accounts.

HSBC - HSBC comes top this year because it offers an interest-free overdraft of £3,000 and the other features are slightly better than the other bank who offer the £3,000 interest-free overdraft, The Halifax.

HSBC’s account pays two per cent interest on credit balances in your first year as a student up to balances of £1,000. This is a good rate of interest for a current account. It pays no interest on balances after the first year.

The unauthorised borrowing limit is 19.90 per cent, about average for the student bank accounts out this year.

Halifax - Halifax comes in second because it is the only other account that offers an interest-free overdraft up to £3,000.

Its other benefits are not quite as good as HSBC’s overall. It only offers 0.10 per cent interest on positive balances and it charges the highest rate of interest for unarranged borrowing of all the student bank accounts at 24.20 per cent and offers no other freebies.

Lloyds TSB - The other student accounts, including this one from Lloyds TSB, all offer up to £2,000 in interest-free overdrafts but Lloyds is the best account for unarranged borrowing rates.

It charges just 8.21 per cent, roughly three times less than the Hailfax. It also pays 1.0 per cent interest on credit balances up to £500.

Additionally, there are a range of other benefits that come with the account including 75 per cent off a holiday booking with student travel specialists STA Travel, free NUS extra card for three years, discounts on over 150 high street and online brands, free text alerts and internet and telephone banking.

If you think you will go over any interest-free overdraft you are likely to get then there is a good argument for saying this is the account to select.

NatWest - The NatWest student account offers an interest-free overdraft up to £2,000. It does not pay any interest on credit balances but does offer a slightly lower than normal unarranged borrowing rate at 17.81 per cent.

It comes with a useful addition for existing current account customers who upgrade to a student bank account of a free four-year 16-25 year-old railcard.

Barclays - Barclays Student Additions account offers an interest-free overdraft of up to £2,000 and a further £1,000 charged at 8.9 per cent APR. It does not pay any interest on credit balances but does offer free text alerts about your account to your mobile.