Graduates go hunting for the best bank deals

To hang on to your interest-free overdraft, you may have to switch banks

Many new graduates desperately need the grace period offered by interest-free overdrafts as they look for their first jobs and start the slow climb over what, for many, are mountainous debts.

Because of this, HSBC's decision to suddenly scrap its interest-free overdrafts for graduates last month left thousands furious and looking for a new bank.

Although HSBC finally caved into the pressure this week, agreeing to allow this year's graduates to keep their interest-free overdrafts, the news may have come too late to stop many making the move.

What angered students the most was not just the short notice of the change in policy, but also HSBC's insinuation that it had started charging interest as a way of teaching students that there is a price for credit.

As the thousands of people who protested on the social networking site Facebook pointed out, it is not the lack of incentives that stop new graduates from whittling down their overdrafts, but a predictable lack of income available to pay off debts while they search for permanent careers. Even once a job is secured, there are numerous start-up costs, such as forking out for new work-place clothing, relocation costs and added travel spend.

Thankfully, HSBC's competitors appear ready and willing to take its deserters on, though with certain caveats.

Joanna O'Brien, senior researcher at financial comparison site Moneyfacts.co.uk, says: "I think most banks will look on these customers in a kind light, but they will look at your experiences with your old bank. Also, if you don't have a job now, they will want to see if you've previously taken on summer work which demonstrates your willingness to keep your debts under control."

Barclays spokesperson Elizabeth Holloway says: "We will welcome them [the HSBC-deserter graduates] with open arms and interest-free overdrafts."

However, if you have no employment, or can't prove you will be employed imminently, you might be turned away. Accepting any job you can while you look for that first career break may help the door to a new bank open that bit easier.

To switch to the likes of Barclays, you will be subject to credit checks and the last three months' bank statements will be considered as part of your application. The bank also asks for two pieces of identification, one with a photograph and one with your address. You might also need to supply evidence that you have graduated in addition to proof of employment. And it asks that you close down your previous graduate account.

Barclays graduate customers can either choose a packaged, fee-charging Graduate Additions account, which offers an interest-free overdraft of up to £3,000, as well as mobile phone insurance and roadside assistance for £5 a month, or the standard Graduate Account, which provides an interest-free overdraft up to £1,500.

If Barclays is not satisfied with your employment prospects, then there are plenty of other places to try.

Lloyds TSB is another bank making a play for HSBC graduate customers. Its managing director of consumer banking Ian Larkin says: "We understand the financial pressures graduates face which is why we extend our interest-free overdraft for three years after graduation. Our doors are open to graduates looking for a financial safety net, regardless of where they held their student account."

Lloyds TSB offers a £2,000 interest-free overdraft in the first year after graduation, £1,500 in year two and £1,000 in year three and advises would-be switchers that regardless of current employment status, it rarely turns anyone down.

While much of the nitty-gritty of moving can be done over the phone, with the help of the bank's account-switching team, the bank says individuals might be better advised to go into a branch and have a face-to-face discussion about switching.

HSBC naturally played down the significance of its climbdown this week. Andy Ripley, HSBC's head of product development, says: "Like any service-orientated business we are not too big to listen to the needs of our customers. Following the feedback from our graduate account-holders, we have taken the decision to freeze interest charging on 2007 graduates' overdrafts up to £1,500 and refund any interest charged in August.

"We are also pleased that we will be working with the National Union of Students to enhance our new account offer so that it fully reflects the needs of recent graduates," he adds.

It's worth noting, however, that there is no guarantee that interest-free overdrafts for graduates are here to stay. Banks are under ever greater pressure to replace their lost profits – and this may well be the beginning of the end for zero per cent borrowing.

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