Student guide to finance 2009

Prepare now for the next student year. We compare student bank accounts, and give you loads of tips to get you started in the world of finance.

Many banks will let you apply for student current accounts (i.e bank accounts) now, even though you may not yet be able to confirm your university place. It's handy to get this out of the way early, and to get an account ready for receiving your student loan.

I'm going to start with a table comparing student accounts and then use it as a starting point to help you with the basics of banking and to avoid student-finance pitfalls.

Student accounts 2009

*Estimated values of gimmicks are my own estimates based on as many details as I could find, and comparing them with similar products you can buy separately.

Which is best?

If you need a huge overdraft, you might want to see if Halifax or the Royal Bank of Scotland will give you something close to their maximum limits. If you can make do with a smaller one, I would think the Abbey account with its £50 bonus or the NatWest account with its free railcard would be the best choices for most.

A few basics

For those of you new to looking after your own money, let me explain what some of the terms mean in my table:

In-credit interest. When you have money in your account, you are 'in credit'. This is otherwise known as a 'positive balance'. 'In-credit interest' is interest you are paid on a positive balance.

AER. This stands for 'Annual Equivalent Rate'. It is the interest you'll get after one year. Your account balance will go up and down all the time, but let's say that, on average, you have £100 in your account. If the AER is 2%, over the course of a year, you'll earn £2. Credit interest really isn't all that impressive if you're a poor student, is it? You can pretty much ignore this benefit.

Variable interest. All the in-credit interest rates above are variable. If an interest rate is variable it means the bank can change it at any time. The only way that a bank is likely to change an existing customer's interest rate is downwards! Banks usually offer higher rates to newcomers only, but not for long. Welcome to banking!

Interest-free overdraft. You're in your overdraft when you're not in credit. To put it another way, you've spent, or drawn out, more money than you have in the account. To put it yet again in other terms you should become familiar with: you are 'going overdrawn', so your account has a 'negative balance'.

If you're not charged interest for going overdrawn, you have an 'interest-free overdraft'. Some accounts (but none of the above) charge an annual fee in return for zero interest. Most student accounts allow you to go overdrawn at any time for free, up to agreed limits. Over those limits, overdraft penalty fees and debt interest is usually extremely high, so keep a tight budget.

Totally cost-free borrowing is a rare and fantastic benefit, but don't let your debts get out of control. If they're still there in a few years, you will eventually be charged interest on them. As I explained recently, the more debt interest you pay, the less stuff you'll be able to buy in your lifetime!

Banks often pull you in with the possibility of a large, free overdraft but when your welcome pack arrives you've been given a much smaller limit. Writing to them to complain often works, but don't assume you'll get the whole whack.

Gimmicks. This is the basis upon which many banks and financial companies sell their products: lots and lots of cheap gimmicks to disguise the complete lack of value. Student bank accounts can be a Trojan Horse, because a couple of them actually do offer valuable gimmicks, as shown above. But don't let this deceive you into believing that all the gimmicks you'll later be offered with financial products are worth it. That is extremely rare.

Do your research

Ensure you read every page about the account and its gimmicks on the bank's website, and every line of the small print (the terms and conditions) to ensure you use the account correctly. You may, for example, have to apply in writing each year for your overdraft limit increase, or submit a claim in the right way at the right time to receive a gimmick. The small print may reveal that a gimmick is really not very high quality.

Gimmicks to ignore when choosing an account

Credit cards. Most people usually regret getting a credit card, but if you must get one, you don't have to do so through your bank. You should strongly consider not taking the card-protection or payment-protection insurances that is offered with credit cards. The linked insurances will be astoundingly expensive, even if your own bank offers you a discount.

Access to cash worldwide. It's expensive to use your student bank card to access cash. Best to avoid it.

Commission-free foreign currency. Banks are an expensive place to get foreign currency, too. Banks, the Post Office, travel agents, and Marks and Spencers have been expensive every time I've checked for years and years. Better to get money online from Interchange FX or Travelex, or from some local dealers in big UK cities, which I have often found to be the cheapest.

'Commission-free' just means that the cost is hidden in the exchange rate, e.g. you'll get fewer euros for your pounds. It's best to look at the overall return when comparing foreign-currency providers. Ask: 'If I give you £100, what will I get back in euros/US dollars after all commission and charges, if any?'

Discounts off products from specified retailers. These simply tie you in to buying products from one supplier. Suppliers who agree to such discount schemes are rarely the cheapest. With high price items, such as laptops, you can haggle anyway so you'll have no need for discounts. In any event, if you want discounts, you don't need to tie yourself to a bank. Instead, look for cashback websites on the internet where you can earn money back on your purchases. Remember, a bank typically has to offer discounts at lots of retailers before it might save you money (e.g. with the NUS card), but the same suppliers often give discounts online in any case.

Other financial services. Your bank is not the best place to seek financial advice or to get financial products. The 'adviser' is a salesperson for the bank, and banks rarely offer competitive products (i.e. cheap products or products with the best terms and conditions). This is because it captures its main market - its existing bank account customers - so easily. You can get all the information you need for most or even all of your financial decisions from independent, impartial sources on the internet.

A few more tips

Remember that everything a bank says or writes to you has a positive spin, but that doesn't mean it is good for you. But finance needn't be frightening! Read all the documentation you're offered - especially contracts - and run them by someone if you don't understand. You'll be fine.

Keep a close grip on your finances. Budget from the beginning, and earn some money when you can while studying. You will be glad you did when you start thinking about buying a house.

Compare current accounts and credit cards through lovemoney.com

More: How to budget in five simple steps | Student loans to cost more than inflation