Which should you choose: Student debit or credit account?

By Marianne Curphey

University students on their own for the first time often face a tough decision: apply for a credit card or make do with a student bank account and debit card?

The answer depends on how much experience you have in managing credit, and whether you think you will be able to control your spending, says Andrew Hagger, founder and director of the money information site MoneyComms.co.uk.

Credit cards for students
With enough discipline, a credit card can be great, Hagger says.

"After all, at 18 you are a young adult, so [it's] fine to get one so long as you feel comfortable that you can use it in the right way," he says. "However, you don't want to be running up a balance of £5,000 and then only be able to afford to pay the minimum amount each month, while paying an interest rate of 18.9%. If you can use it wisely and pay it off in full each month, then it can be a useful financial tool."student-debit-or-credit

You should also be sure to get a card that fits your personal needs,
Hagger says.

"Some credit cards have a maximum credit limit and some have a
minimum limit, for example," he says. It may help to determine what you'll use the card for (e.g., textbooks, groceries, emergencies) and estimate
how much you'll need to put on it each month, then look for a card within those parameters.

However, Jane Tully, head of insight and engagement at the Money Advice Trust, which runs National Debtline, said credit cards should be used only
in certain circumstances, such as security deposits, overseas studies or other scenarios where a debit card isn't accepted.

"Credit cards must be used with caution and only if you are sure that you will be able to meet repayments," Tully said in her emailed response to questions. If you can't be certain of this, she said, a credit card might not be suitable for your needs. You could find yourself in a serious financial situation, which could put your credit rating -- and future borrowing -- at risk.

Student bank accounts
For those who aren't ready for credit, a student bank account may be the better choice. You'll get a debit card, which will allow you to make online purchases or simply not carry cash. Most accounts come with interest-free overdrafts, allowing you to get a feel for credit without the interest or potential damage to your score.

"The most important piece of advice I can give students is to steer clear of the freebies and look at the account features and charges in detail," says Hagger.

For instance, many student accounts offer free railcards or free overdrafts. However, "if you just took a £2,000 overdraft ... and then later you found you needed an extra £1,000, then to add that on it would cost you an extra £154 a year, which far outweighs any freebies you might receive," he says.

"It can be easy to be enticed by introductory offers and other joining incentives but consider how you will be using the account on a day-to-day basis and what features you may need -- such as an overdraft or insurance for electronic devices -- to make sure you get the most out of the account and you aren't being stung by any expensive features you don't use," Tully said.

But Sharan Jaswal, education director at financial and enterprise charity MyBnk, warns overdrafts can be dangerous, too, if you fail to come out of overdraft before you graduate.

"With my overdraft, as soon as I graduated, the interest rate rose, and then other charges came into effect," she says. "Even today, there is still variation in the charges made by the different bank account providers."

Jaswal suggests looking for an account that won't allow you to overdraw or at least one that lets you know you're nearing your limit. At the very least, be sure you know all the terms and conditions of the account -- something you should do regardless of what type of account you get, Tully said.

"There is a huge jump from living at home to being independent at university," Jaswal says.  "Everything comes at once -- your overdraft, credit card and student loan all need to be managed and we explain to young people that they need to choose a financial product that suits their needs."

"It is often a steep learning curve, and without a real commitment to budgeting in line with the money you have coming in, you can quickly find your finances spiralling out of control," Tully said.

If you ever are concerned about your finances or are struggling to deal with debt, seek advice as soon as possible from your school's student union, which provides on-campus help with finance and budgeting, or the National Union of Students (NUS). You can also seek a free debt charity such as National Debtline.

See related: Why is student credit card debt rising?, Two universities make credit card education priority, Your guide to student finance

Published: 11 September 2015