New suit, new full-time job, new payslip - same old overdraft. Graduates may be excited about leaving their studies behind and entering the world of paid employment, but they'll find some things take longer to change.
While your salary should help you chip away at some of your debt, it may do little more than that. Research from the Association of Graduate Recruiters reveals that the average graduate starting salary is £21,000, yet one year after leaving university, nearly two-thirds of former students will still have an average overdraft of £1,057, according to HSBC. This is quite apart from the government-backed loans that most students need to pay their way through university, which are likely to run into thousands of pounds.
"Dealing with debt is usually the most pressing issue facing graduates," says Rebecca Stephenson, head of personal customer marketing at HSBC.
Even three years after leaving university, more than four in 10 graduates will still be overdrawn by at least £925, the bank reveals.
As debt is expensive, it's essential to reduce it as quickly as possible and keep charges to a minimum in the meantime. Most of the major high-street banks offer a staggered interest-free overdraft over three years on their graduate accounts. This will be a maximum of either £2,000 (NatWest, Abbey, Lloyds TSB) or £1,500 (Barclays, HSBC) in the first year, before, in most cases, dropping over the next two years to £500.
"It's all about getting back into the black," Ms Stephenson adds. "Your interest-free overdraft won't always be that way."
Thankfully, banks don't demand overnight repayment of an overdraft, but they will expect you to whittle it down. Remember that you don't have to stick with the bank you ran up the overdraft with in the first place. And when shopping around for a good rate, look beyond the freebies on offer, such as driving lessons (HSBC) and return flight vouchers (Lloyds TSB).
Don't assume, though, that you can simply switch your debt from one bank to another to take advantage of more generous terms on overdrafts. Banks may be keen to attract you as a new graduate customer (who hopefully goes on to buy mortgages and insurance later in life), but most will want to examine your finances, income and debt repayment plans before agreeing to an interest-free limit.
If you need an overdraft limit above the interest-free zone, watch out for high rates of interest. Lloyds TSB charges 7.4 per cent to students for authorised overdrafts, but 15.4 per cent to graduates. Cheaper rates are available elsewhere - 8.7 per cent at Abbey or 14.8 per cent at HSBC - but, in all cases, beware of punitive interest and possible extra charges if you breach this authorised level.
Overspend with Lloyds TSB, for example, and you will be charged 29.8 per cent interest on top of a £20 fine for each day that you make an extra withdrawal from your account (capped at £80 a month).
Don't forget that, as well as your overdraft, you'll have to repay your government-backed student loans once you start earning at least £10,000. Nine per cent of all income above this sum will deducted from your salary at source.Reuse content