Hundreds of thousands of students who graduated a year ago could soon find that they are paying interest rates of up to 19pc
Graduates are being warned to be on their guard against paying sky-high interest rates on overdrafts. Most graduate accounts offer a three-year interest-free period but the overdraft limit drops on a yearly basis – and for many of these account holders the news can come as a shock.
Amy Willis earned a postgraduate degree at Cardiff University last summer and was surprised when she received a letter this month from NatWest stating that in two weeks her interest-free overdraft would be reduced from £2,000 to £1,000.
Miss Willis, 26, said: "When I opened the letter, the bank said that if I was unable to reduce my overdraft by £1,000 by the end of the month, the interest rate would increase to 17.5pc. Fourteen days does not seem enough notice to come up with £1,000. It doesn't even give me time to get paid."
Annual reduction of overdraft is standard procedure
Miss Willis feels she was not given enough time to prepare and fears she will be forced to pay the interest charges: "While the bank claims it notified me of the tier rates when I set up the account, that was seven years ago.
It also claims that it sent me new terms and conditions when my student account became a graduate account, which I'm sure I never received. But even still, a year is a long time and then to be given two weeks notice was a real shock."
However, a NatWest spokesman said that the letter sent out in July was only a matter of courtesy and that as the annual reduction of the overdraft is the purpose of the account, it did not feel that more reminder letters were necessary.
She said: "The stepping down of the overdraft is part of the Graduate account and customers are advised of this when they open their student account and the point at which it converts to a Graduate account. It steps down in July each year."
A quick survey of five high street banks found that the notification period varies from lender to lender – some even saying no written notification sent out at all.
Students must be careful not to fall into a debt trap
James Daley, money editor at consumer advice magazine Which?, said: "Students need to keep a close eye on their bank account when they leave university as the terms, conditions and interest rates are likely to change after they leave university.
Most banks give graduates some additional time to pay down their overdraft without paying any interest – but if you're in any doubt about what the deal is with your bank, it's well worth picking up the phone and checking."
Andrew Hagger, spokesman from MoneyNet, said that banks should do more to remind customers of any changes to their accounts within a reasonable time frame, especially if it will leave them out of pocket.
"While the details of these interest-free limits will be explained when the account is opened, I think that it is reasonable to expect your bank to remind you within a month of the limit being reduced, especially if banks want to be known as transparent and for treating their customers fairly," Mr Hagger said.
Steven Jackson of Beatmydebt.com commented that the situation highlights the need for students to keep their debts under control. It is very easy to build up large debts while at university however graduation comes around all to quickly and then these have to be paid for which is much more difficult" he said.
"We are seeing more and more graduates with debts of £20,000 plus who are unable to cope with their debt repayments. People who find themselves in this position should take advice early to get a solution in place before their debt gets out of hand and their credit rating is effected" Jackson added.
Transfer balances to interest free credit card
For graduates who are worried about repaying hefty charges, it may be worth considering a credit card that offers interest-free terms on balance transfers.
By transferring the debt to this type of card, you may be able to buy yourself some time with repayments. This is by no means a permanent solution, as the interest on credit card balances can be even more than your new overdraft rate, but if you are trying to pay down the debt over the next 12 months, this may be the best option.
However, this might not work for many due to the strict application criteria laid down by the lenders.
Mr Hagger said: "While an interest-free credit card would certainly give you some added breathing space, getting one may be more difficult than you would expect as your credit record needs to be top notch for your application to be approved."
If you are lucky, there are now cards on the market that allow balance transfers and pay no interest for a fixed period. Companies offer such cards to win new customers and hope to recoup their costs when you start paying the card's standard APR.
Once the interest-free time limits are up, it is important that you have either repaid your debt or you are able to switch to another cheaper card, otherwise you will end up paying rates above 16pc.
Careful money management
A golden rule for those transferring their balances is never spend more money on the credit card when you have transferred your balance. This new debt will be repayable at a higher rate and you will often not be able to repay it until you have paid back the cheaper debt already accrued.
Steven Jackson agrees. "An interest free credit card facility can be an ideal way of avoiding significant overdraft interest. However, if you are trying to manage a debt problem, the bottom line is you should not use the card at all. Cat it up and simply concentrate on paying off the balance" he advised.
Cards worth a look are the NatWest Platinum MasterCard and the Yorkshire Bank Gold MasterCard that both offer 0pc on balance transfers for 16 month. Both cards charge transfer fees of 2.9pc and 3pc, respectively.
David Black, from banking statisticians Defaqto, suggested graduates take this opportunity to have a look around and see if there are any better, more suitable accounts available.
He said: "Barclays and Santander both have current accounts that offer interest-free authorised overdrafts for 12 months. Both accounts are available for people switching current accounts and depositing at least £1,000 every month."
However, Mr Daley recommended graduates in this predicament consider a graduate loan to pay off the outstanding debt.
He said: "More and more students are emerging from university with sizeable overdrafts – on top of their student loans – and it's important that this debt is paid down before the bank starts charging interest. Once you're more than two years out of university, it's likely that hefty interest rates will kick in. If you still haven't cleared your overdraft at that stage, you may be better off taking out a graduate loan, which will charge a more reasonable rate."