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Speak up! Advice costs nothing, credit can be costly

You’ll learn so much as a student – and not just from your course.

Managing money is tough and, unlike exams, there are no mocks or practice essays to help you get it right. In fact, chances are, at some point, you’ll need help. If you’re worried about your finances, speak up and seek advice. Advice costs nothing, credit can be costly.

Dealing with debt

Whilst it’s good to be cautious about borrowing money in general, remember that some types of debt are more costly than others.

Your student loan (and indeed a mortgage) for example, is a necessary form of funding for most. Other debts – such as credit cards and normal personal loans – are a bit different.

Let’s take a closer look at the debt you might come across as a student:

A student loan is not a typical sort of loan. For a start, you don’t get it from the bank. This means that although you are borrowing money, the terms are much more affordable than those offered by a bank or building society. The biggest benefits to take note of are:

  1. The interest rate is low. Interest is charged at inflation plus 3% whilst you’re studying, and at the current RPI (that year’s inflation rate) once you start earning between £15,000 and £21,000. It rises gradually as your earnings increase to a maximum RPI plus 3% if you earn £41,000 or more. Visit Student Loans Company for more info.
  2. You don’t pay a penny back until you graduate and are in full-time employment, and even then paying it back depends on how much you earn – which makes it much more like a tax than a loan (in other words, if you don’t earn enough you won’t pay it back, which is similar to how income tax works).
  3. Despite being a debt, your student loan will never affect your credit rating – a grading system used by banks and lenders based on how well you manage your money – whereas failure to pay back a normal personal loan or a credit card will.

As with any sort of borrowing, be sure you understand the pros and cons before signing up for a student loan. However, most students can’t afford university without it and, in comparison with other forms of lending, the preferential interest rates and repayment conditions make it much the safest option for students.

An overdraft is an agreement with your bank that you can spend more than you have in your account, and, if you have a student account, you often won’t pay any interest on it until you graduate.

Be cautious about using your overdraft though – for the following reasons:

  1. If you spend more than your agreed limit you may be hit with large fees, so don’t be tempted – this is not free money.
  2. The 0% interest rates don’t last forever. Make sure you know what your repayment terms are; there’s usually a 1 to 3 year grace period after graduation, but then that’s it. Also, be sure to clear your debt before these charges mount up.

A credit card or store card offers another way of borrowing money from the bank. Unlike your student overdraft however, this usually comes with tight repayment terms (generally a month) and high interest rates (often between 6 and 20%). Not paying back can lead to increasing debt. Remember, too, that paying back the ‘minimum’ will mainly only clear interest – and that you keep accruing interest on anything outstanding. So that £50 impulse buy could end up costing you £100, £200 or even £300 if you don’t clear the whole balance as soon as you can.

However, if you only use credit when you can pay it back in full, having a credit card can actually improve your credit rating, which will be important later on in life. Using credit for things like flights and online shopping can also offer payment protection, meaning you’ll be refunded if something goes wrong, such as cancellations or non-delivery.

If you need a large amount of money for a specific purchase, then you might be tempted to take out a loan. However, a personal loan is not equivalent to a student loan. Any money you borrow from a bank or building society has to be paid for promptly, and you won’t be given preferential repayment rates just because you’re studying. A fixed repayment schedule will therefore be drawn up – taking into account both the debt and accrued interest – and you will be expected to make these payments on time, or pay charges (making the cost of the loan more expensive overall).

This one is simple: never be tempted to take out a payday loan. Although they offer immediate cash, the interest rates (typically expressed as an annual sum, known as APR) are extremely high. They may also affect your ability to attain credit in the future, even if you pay back immediately. Avoid at all costs!

If you do get into debt, try not to worry: your bank or building society wants to ensure that you avoid financial difficulties, and will do everything possible to help. So, if you have concerns, speak to an advisor as soon as possible and they’ll work with you to come up with a plan to manage your debt and budget more effectively.

Read more below or go straight to Where to turn for help

Credit rating: the bottom line

As you become financially independent, banks and lenders will begin to build up a picture of what you’re like with your money and grade you accordingly.

This means that if you ever want to borrow from them, they can see how responsible you are with money, and lend appropriately.

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How are credit scores calculated?

Credit ratings can seem mysterious: no-one knows the exact calculation used to determine a score. However, we do know that the following factors affect a credit rating, so take note and keep your account(s) healthy:

What they will check:

Your past and current bank dealings. Have you stayed within the limits of any credit agreements you have (including your overdraft)?

Your bill payments, including rent, utilities and mobile phone contract. Do you pay on time or are you sometimes late?

Your loan history. Have you paid back borrowed money on time?

Your credit history. Do you have a good track record of managing credit well? (This is where careful management of a credit card can be a good thing.)

Your legal history. If you’ve run up any debt, have you paid it back on time? Have you ever been issued with a CCJ (a county court judgement that’s used to claim back money a creditor is entitled to)?

What they won’t check:

Your savings account(s). Only your current accounts form part of your credit rating.

Your salary. This won’t impact your credit score directly (although the bank will check what you’re earning).

Your student loan repayments. Since it is not a commercial loan, your student loan doesn’t have any impact on your credit rating.

If you’ve checked your credit score! The three major UK credit agencies – Experian, Equifax and Callcredit – won’t tell anyone if you download a personal report to see how you’re doing.

Where to turn for help

Sometimes, even with a budget and the best intentions, things don’t always go to plan.

If you find yourself short on money or falling behind with payments, make sure you speak to someone who knows the score, such as:

Your bank or building society

Don’t feel that your bank is unapproachable: they will always listen if you tell them you need financial help. Book a chat with a friendly advisor, who can help you work out a plan to get back on track. They can also talk you through all the features of your student account in more detail, and help you learn how to budget better going forwards.

Your university

Most universities keep some money in the pot to help students who are struggling financially. Sometimes these funds are set aside for those with specific needs: students with disabilities, dependants or from low-income families. However, there are often additional hardship funds available for any student who faces unexpected financial difficulties.

If a lack of cash is getting in the way of your studies, speak to your university welfare team immediately. They’ll help you apply for any grant or bursary going, but will want to see details of your student loan and copies of your budget and bank statements first.

The National Association of Student Money Advisors – a registered charity supporting students with their finances – can also offer impartial advice, as can debt organisations and services such as StepChange and Citizens Advice.

Your parents

If you need advice, don’t be afraid to ask your friends. At the very least they’re likely to take an interest in your ongoing studies and welfare. Also, if they can help with your cash flow in the short-term, they’re unlikely to enforce unreasonable repayment conditions. Show them your budget and the steps you’ve taken to remain solvent to prove that you understand any help is a privilege, not an expectation.