overdrafts

If you’ve budgeted for the year ahead (i.e. calculated your total income and expenditure) and discussed with your parents how much support they’re willing to give you, then you’ll be in a better position than most students. However, nothing can prepare you for the change in lifestyle that university brings. Your money will soon vanish on food, books, going out and travel. Most students ask their bank for an overdraft to act as a buffer for those months when you’re a bit short (especially the week before your next student loan instalment!).

Overdrafts are great while you’re still a student as they are interest-free, can be quite flexible to extend, and are usually decreased on a gradual basis after graduation. However, if you rack up a few thousand by your third or fourth year, then this will be quite a hefty amount to try to repay when you do graduate (and the interest rate will be similar as for normal current accounts). Most graduates then take out a loan to repay the overdraft, and the terms are not especially more favourable than any normal personal loan. Also, remember that if you exceed your overdraft limit then there may be hefty fees charged to your account.

However, overdrafts are important tools for many students and there’s no getting over the fact that they are free while you’re studying (if yours isn’t then compare with other student accounts) and they may be your only means of survival towards the end of the final term!

credit cards

The f:team say uh-oh to credit cards or store cards, particularly for impulsive, frivolous purchases. However, there are some situations where your plastic can perform in your favour ...

Once you leave university you may wish to take out a graduate loan or a professional studies loan, or you might want to apply for a credit card with a competitive rate. Other purchases facing graduates include taking out a mortgage on their first home or buying a car on finance. When you apply for finance in any of these situations, the prospective lender will obtain your credit rating from a credit reference agency prior to approving the loan. It may therefore be a good idea to build up a good credit history whilst you’re at university so that you don’t face any credit problems after you graduate.

You can build up a good credit rating by owning one or two credit cards (not store cards!) and using them responsibly. Always pay off the balance at the end of every month (before the repayment date on your statement), although if you’re really struggling make sure you transfer at least the minimum repayment. Being on the electoral roll also helps your rating, as does living at the same address for a while (this can be difficult as some students move each year). Getting rejected by one prospective lender can cause others to reject you, so be careful not to allow too many searches and subsequent rejections to build up on your credit file.

emergencies

If you find yourself in a tricky situation and no money then a credit card could be your saviour. Credit cards are accepted most places (even taxi companies usually take credit cards if you let them know this is how you’d like to pay when booking your cab) and so there is a benefit of safety to be considered.

protection

Paying for products or services by credit card usually provides extra protection should they turn out to be faulty or unacceptable. Also, if someone gets hold of your details and you wind up with a monthly statement showing purchases in Hong Kong then it is usually much easier to claim your money back as a victim of fraud than if your bank account details had been stolen.

bridging loan

A credit card can be useful when you really need something now but won’t have enough cash until another couple of weeks. Just make sure that you pay it back when you do get the money later in the month!

other benefits

Some credit cards also offer other benefits such as free travel insurance and discounts at selected stores. Always check for these benefits as you might be paying twice for something! However, it’s always best to choose a credit card based on the APR and any special introductory offers such as 0% on purchases for 6 months, rather than the odd discounts at stores that you might not normally shop with.

warning: credit cards may seriously damage your graduate wallet!

Don’t be fooled by the introductory offer of 0% on purchases for the first 6 months – you will have to pay it all back at the end of 6 months or, worse still, when you graduate or else the credit card company achieved what it set out to do … get rich on the interest. By all means, take advantage of any special offers in the first few months but make sure you have enough money set aside to pay it back once the offer ends. It is a complete waste of money paying interest on credit cards. If you do find your credit balance creeping upwards, consider transferring the balance to a credit card with a rate of 0% on balance transfers, but be sure to cut up your old card!

Resist the temptation to take out store cards. They nearly always carry worse rates than high street credit cards and some even have APRs of more than 30%. They have clever ways to encourage you to sign up such as 25% off your first purchase, but if you are tempted by this, cancel the account as soon as you have paid off the card at the end of that first month.