My Favourite Student Bank Account

Q. Where to begin with student finances? A. A fantastic student bank account. Here's one Fool's top choice.

So you're about to go to university and you're hunting around for a good student bank account. If you can get to grips with your finances right from the start, you won't regret it in future years, as I'm sure many, many debt-laden post-grads could tell you. The less debt you have when you finish, the faster you can pay it off and start saving that deposit for a house.

In terms of personal finance, one of the most important things to master is interest rates. For most students, this will mean interest paid on debts, rather than interest earned on savings. The best place to start is by choosing a student bank account with an excellent overdraft facility.

When choosing a student account you should consider the overdraft interest rate and how large the overdraft facility is. With this in mind, I consulted Moneyfacts and browsed through many banks' terms and conditions to find the best student accounts.

The best current account for students is with Halifax which has an interest-free overdraft facility of £2,750 every year from year one of university. Considering that the next best is £2,100 with Bank of Scotland and that the average interest-free overdraft is roughly £1,300, the Halifax account is a clear winner.

As with most accounts, you can agree a higher overdraft limit. Any overdraft over £2,750 is charged interest at 7.2%, which is about as good as you can get.

Halifax also offers the gimmick of 25% off AA breakdown cover, but students will save a lot more by buying from a cheaper provider, such as Europ Assistance or AutoAid (assuming they own a car of course).

Whilst we're talking about gimmicks, some student current accounts offer iPod Shuffles or MP4 players, but these incentives cost you a lot more in poorer terms and conditions, such as smaller interest-free overdrafts. Other accounts come with discounts at selected stores, but normally this just means you go out and spend more at expensive shops that you wouldn't normally visit, and then you'll pay interest on your purchase anyway, because you don't have a large enough interest-free overdraft!

Halifax charges £28 if you exceed your agreed overdraft limit. This is extortionate, but not unusual. Hopefully you'll take care not to breach your limit, but if you do you should eventually be able to claim back these unlawful bank charges!

Let's compare Halifax with a more typical student account, such as the one you get with HSBC. If you agreed an overdraft of £2,000 with HSBC, you could end up paying £350 in interest, whereas you'd pay no interest to Halifax.

As one Fool wrote before Halifax had announced this year's updated terms and conditions, you might be tempted to go for NatWest's student account, as it offers a five-year railcard worth about £100. However, most students will do far better to buy railcards each year and to get a bank account with a larger interest-free overdraft facility. You're probably going to need it!

There's another final thing to point out: sometimes banks try it on. For example, they might not give you your full interest-free overdraft. If this happens to you, call them up and ask them to increase it. And always read the small print thoroughly for any other nasty tricks!

> More from The Fool! Compare current accounts and compare credit cards.