Student Information, Advice & Guidance
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Safe and sensible credit
As a student, particularly if you are a new student, you are likely to find that you are a
prime target by banks, credit card companies and shops offering you what might appear
to be tempting deals on credit and store cards. There are some good deals to be had but
be wary of offers which seem to offer the world - everything, especially credit comes at a
cost! If in doubt always seek advice.
Overdrafts
Most highstreet banks will offer an interest-free overdraft
facility to ‘home students’ on their student accounts, in the
hope that you will stay loyal to them when you graduate.
This is rarely available to EU and International Students
but shop around; if you have lived and worked in the UK
previously it may be possible to open a standard student
account.
The amount you get on an overdraft will depend on the
bank and will apply to all its student applicants. A good
benchmark is around £1,250 interest-free. The overdraft
will not cost you anything if you stay within your interest
free limit, BUT if you go beyond it you will be charged a
hefty interest rate on the difference and usually a one-off
unauthorised overdraft fee as well.
As for repaying the overdraft, there is no specific time
limit, unless your bank sets one. After leaving university,
the interest-free perk will simply evaporate and you will be
charged at the same high rates that apply to overdrafts on
standard current accounts. Some banks provide a grace
period after graduation before the higher rate kicks in.
Shop around and consider switching if you know that you
will need your overdraft for longer.
If your bank offers you an overdraft at a fee or if it is subject
to interest, consider very carefully whether you need this
facility and how much it will cost you over the long-term.
Credit cards and store cards
Credit cards and store cards are a major contributing
factor to student debt, our advice is to try and avoid them
at all costs, however they can have their benefits as well
as disadvantages. We have observed that it is easy to run
up debts on cards and you may find yourself in a position
where you are not only worrying about the original debt
but also the added interest. This is because interest rates
on credit and store cards can be very high and have the
potential to increase the debt at an alarming rate. If you do
have a credit or store card, or are considering applying for
one, you may wish to consider the following:
• In attempt to get your custom you may find yourself
being tempted by things like free gifts, cash back, or
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points which can be redeemed later. This is fine if it
is the right card for you, but remember to look at the
terms and conditions of the card, not the free offer!
If you are not able to pay your credit card bill in full
every month, the high amount of interest added will
outweigh the value of any free gift or loyalty points.
Some companies offer a 0% interest rate for a period of
time, often 6 months. However be aware once the 0%
period is up, if you cannot pay off your balance in full
you will probably be hit with a hefty rate of interest.
You could end up paying more than you would with a
low interest credit card. Only use these cards if you
are confident that you will be able to pay the full
balance by the end of the interest free period.
Always make your monthly payments on time and do
not exceed your credit limit. If you do, you will find
yourself facing extra penalty charges!
Missed payments stay on your credit report for years
and could harm your chances of getting finance in the
future (e.g. a mortgage).
Remember a credit card/store card is not a way out of
financial difficulties - they are far more likely to lead you
into financial difficulties than out of them. Only use them
if you can pay the balance in full each month, otherwise
you debt will increase each month with interest.
Don’t be tempted into using a card by only having
to pay a small amount off your balance every month;
minimum monthly payments can be as low as 2% of
your balance. However, the less you pay each month,
the longer it takes to pay off your loan, and the card
company will make more money from you in interest.
IF YOU THINK YOU WON’T BE ABLE TO PAY OFF YOUR CREDIT OR
STORE CARD (IN FULL) EVERY MONTH, DON’T GET IT!
Advantages of a credit card
1. They can be free if used correctly. Generally credit
card companies don’t charge any fees if money is
repaid on time but read the small print.
2. Purchase Protection. If you buy goods using your credit
card but they turn out to be faulty, you are normally
100% insured for a specified period. Insurance can
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also cover the item if it is lost or stolen. It is important
to check to see what cover is available because some
cards are far better than others, with some companies
offering no protection at all.
3. Loss Protection and Security. There is far more
security if you pay for goods with a credit card than
with cash. If you lose your card or if it gets stolen you
are by law only liable for the first £50 if the card is used
by a third party. It should only take a quick call to the
credit card provider to cancel the card and issue a new
one. If you tell someone your PIN or write it down it
will invalidate your protection
4. Use a card to rebuild your credit rating. Having a
good credit file is important as it offers you financial
options and cheaper credit, should you need to finance
a mortgage, loan etc. One way to improve a credit
rating is to ensure that your monthly repayments on
a credit card are always up to date, which will build
up a responsible profile with the credit rating agencies,
especially if you have had a bad history in the past.
You may wish to seek advice in these circumstances,
as it is likely that you will only be offered a very high
APR in the first instance.
5. 0% Balance transfers. These enable you to transfer
a balance from one credit card to a different one
that perhaps is charging less interest, usually for a
specified period of time. Note there is often a oneoff fee charged, normally 2.5% of the amount being
transferred.
What is APR?
The APR refers to the Annual Percentage Rate, i.e. the
interest charged. Usually, the lower the APR is, the less
you pay. However the amount you pay does also depend
on how the interest free period is calculated, so there can
be cases where a lower APR does not necessarily mean
a better deal. Therefore it is also important to find out
when the credit card company starts and stops charging
interest. The amount of APR charged varies between
credit card companies, but generally falls between 10%
and 24%. Be aware that store cards generally have a
higher APR than credit cards, the average being a
massive 30%.
For example if you have a balance of £1000 at the
beginning of the month, and make no purchases etc.
At an APR of between 10% and 24%, charges for that
month will range between £8 and £20. If you leave
your credit card for a whole year without any changes
to the balance you will have ended up paying between
£96 and £240 in interest alone!
The Money Advice Service have produced a loan
calculator which can help you to calculate the cost of
your credit; we recommend that you use this to test
whether or not you can afford the full cost of the debt.
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6. Free travel insurance. Often if you buy an airline ticket
or a holiday using your credit card you’ll get free travel
insurance. Always check the details as the policy may
not be as comprehensive as stand-alone policy.
7. Travel Advantages. Spending money when abroad via
a credit card could be cheaper than using cash obtained
from a cash machine, but it can still be expensive if you
don’t have the right card. Always check the charges
with your bank before you go. Also, when you use
your card abroad there is the added bonus of protection
should the goods be faulty or lost but there may be an
additional surcharge for using a credit card.
Disadvantages of credit cards
1. Interest Rates. The rates charged are normally
between 10% and 30% make borrowing money via a
credit card extremely expensive if not paid off in full.
2. Interest is not always calculated in the same way.
When comparing interest rates most people look at the
APR. However there are ways of circumventing APRs
whereby it is more expensive to borrow on a card that
charges interest at 12% rather than one which charges
15%. Read all the small print carefully, especially
where there are interest free periods.
3. Low minimum repayment levels. Often between 2-5%.
The less you pay per month the longer it will take to
repay and the more interest you will pay over the term.
4. Be wary of credit card cheques. They encourage
you to spend more at very high interest rates. Often
these cheques are more expensive because interest is
charged from the time the cheque is used and often
with a handling fee of 2%.
5. Sometimes buying goods/services are more expensive.
Ever booked a flight? Pay by a Debit card and it is one
price, pay by a credit card and the price is usually 3%
higher.
6. Payment Protection Insurance (PPI). The idea behind
this insurance is that your bills are paid if you are
unable to work because of illness or an accident. The
problem with this insurance is twofold, it’s incredibly
overpriced and many claims are refused. Plus, you’ll
often be sold it when you don’t even qualify, i.e.
you’re a student and not working full-time. Speak to a
Student Adviser if you have been missold PPI.
7. ID Theft Insurance. ID theft normally costs around
£50 - £100 a year - but is it worth it? You could invest
in a cheap shredder instead and be careful when you’re
online (see our Credit Scoring & Identity Fraud guide).
8. High credit limits. Card companies often offer far too
much credit to people knowing full well that many
of them can’t be trusted not to overspend. A limit of
£1,000 - £2,000 is more than enough for most people
but higher limits of £7,500+ seem to be more the norm,
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even for people earning less than £20,000 a year.
If you can’t trust yourself with a lot of credit call your
provider and ask for them to lower it.
9. Spending when abroad. You can be charged around
2.75% for the FX (foreign exchange) loading fee and
then a handling fee of 2.5% if you draw money out
from a cash point machine or bank. If you use your
card a lot abroad the fees mount up very quickly. But
these fees and charges can all be lowered if you get the
right Card always shop around.
10. Dynamic Currency Conversion (DCC) If you go to a
restaurant abroad, occasionally you will be offered
the option of paying in sterling, known as the DCC.
The Restaurant then adds its own handling fee on top,
which will make the bill more expensive than if you’d
paid in the local currency.
11. Annual Fees. Most cards don’t charge any fees (as long
as you pay at least the minimum payment each month)
but annual management fees are starting to creep in at
around £2 a month. Competition is always strong in
this market so if your card wants to charge you such a
fee, consider shopping around for a new card provider.
12. Low Usage Fees. If you haven’t used your card for
between 6-12 months you may be penalised and
charged £10 - £30 per year. These are called inactivity
fees. Avoid them by using your Card once every few
months, even for small purchases.
13. Expensive to withdraw cash. Firstly higher rates of
interest are charged for cash withdrawals. Secondly,
interest is charged from the time the money is withdrawn
plus a 2%-3% fee will be charged as well. Don’t use your
credit card to withdraw cash, use a debit card instead.
If you find yourself in a situation where you are regularly
withdrawing cash on a credit cards because you have
no money see a Student Adviser who can guide you on
how to handle your finances more effectively.
14. No proper definition of a cash withdrawal. If you use
your credit card to make an electronic money transfer
(like Western Union), fund a pre-paid credit card,
or use for online gambling, these are treated as cash
and therefore extra fees will be charged plus a higher
interest rate. Please note: Gift Vouchers and gift cards
are also treated as cash, so watch out.
15. Interest charged on full balance if full balance not
paid off. For example you start University and buy
a new laptop and other items. Your bill comes in at
£500 and you pay £450, leaving a negative balance of
£50. You would think the interest bill on next month’s
statement would be much less as you paid the bulk of
it. No, as you didn’t pay the full balance, interest is still
calculated on the full £500 bill. Watch out for this as
it’s a subtle trick and many people caught out.
16. Funds must be cleared by the payment due date. Some
people forget that when you pay a credit card bill the
money won’t clear into your account for up to 5 days.
Even if you pay in cash at your local bank it still takes
the same amount of time. Always aim to pay your bill
a minimum of 1 week before payment is due.
Loans
Many ‘home’ students take out a Student Loan from
Student Finance Direct. EU and International Students
may also be able to access student finance from their home
countries but for those who are ineligible for funding and
are not supported by family or a sponsor a bank loan may
be their only option. Bank loans (including Professional
and Career Development Loans) are usually much more
expensive than Government Loans and you may need to
start repaying them shortly after you graduate. Always
shop around for the best deal and make sure that you
have exhausted all alternative options; family support,
sponsorship by a government or private agency, trust and
charity support. Seek advice on alternative sources of
funding before committing yourself to a bank loan.
Once you have signed a loan agreement you may have a
limited time to change your mind and if you wish to pay
it off sooner there is usually a charge, but it still may work
out cheaper
The real cost of credit
Credit basically means borrowing money to spend and pay
back later. The student loan is in itself a form of credit.
Credit has become a lot more freely available in recent
years with the result that the average consumer borrowing
(excluding mortgages and student loans) now averages
£9,280 per UK adult (Source Credit Action).
Research by Reform and Chartered Insurance Institute
reveals that 50% of the 18 – 34-year olds surveyed had
debts (excluding mortgages ) up to £10,000 and 20% had
debts (excluding mortgages) greater than £10,000. Nearly
a third of have no savings at all. FSA research shows that
one-in-three students are constantly overdrawn; twoin-five students admit to being completely disorganised
about their money; and one-in-three never check their
bank statements or, if they do, they only check the final
balance.
The annual survey by Push, the UK’s leading independent
resource for prospective students, has found that student
debt now tops £4,500 for each year of study – a hike of
Pay Day Loans
When you have short-term cash flow problems these
loans are very tempting as they are a quick and easy
source of finance, especially if you have a poor credit
history but the interest rates are very high! Be realistic
about how much this will cost you in the longer term and
seek advice on alternative options.
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9.6% since last year. Students who started at university
last year can expect to owe over £17,500 by the time they
leave and new students should reckon on nearly £4,000
more than that. The national average projected debt on
graduation now stands at £14,161.
As a result student debt has become a fact of life, but it is
seen as an investment in your future – nevertheless if you
can limit the amount of debt this will mean that you will get
more enjoyment out of your earnings in the future, giving
yourself more opportunities to buy a home, travel or set up
your own business. In light of the global financial crisis it
has never been more important to use caution and make
informed choices when it comes to borrowing money, even
when you are using a pre-existing credit facility.
The first thing to remember about credit is that if you
borrow money then this will affect your quality of life in
the future when you have to use some of your income to
repay what you have borrowed. Secondly, if you borrow
money that you cannot afford to repay then debts can
spiral and become a real problem. If you miss repayments
then this can affect your credit rating and make it hard for
you to access credit in the future. If you are going to use
credit here’s a few important points to consider:
• Always check the APR and read the terms and
conditions so that you can more accurately weigh up
the full cost of credit. In order to make an informed
choice about the money you borrow it is vital that you
work out how much you will actually repay.
• As well as knowing the APR, you also need to know
how long you have to pay the debt back. You need
this in order to work out how much you’ll be repaying.
If you borrow £100 at 13% APR for one year you will
pay less in interest than if you borrow the same amount
at 10% APR but for two years.
• Most credit cards will not charge you any interest if
you pay off the balance before a certain date.
• Most student accounts have interest free overdrafts.
Some credit cards are offering 0% interest on balance
transfers for fixed periods, so it is certainly worth
considering this option if you have an outstanding
credit card balance. BUT make sure you clear the full
balance before the end of the term or you may have
to pay interest on the full balance of the card over the
interest free period. ALWAYS READ THE SMALL PRINT.
• If you’re worried about the interest that is building up
on your student loan it is worth remembering that the
rate of interest charged is usually very low.
• If you think that your debts are becoming a problem
you should get advice as soon as possible, please contact
the Student Advice Service for an appointment.
Cost vs. Benefits
When using a credit facility to pay for something always
consider the costs and benefits of your choice. For example
you wish to purchase a new laptop and specialist software,
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which is estimated to cost £1000; consider your options
and the cost and benefits of each.
1. Save for the item using an ISA over 1 year. Use the
savings and interest you have earned to pay in cash.
£83.34 pcm plus interest = £1000+ by the end of the
year. Please note ISAs and other fixed rate savings
accounts often have minimum periods where you can
withdraw your cash otherwise you may have to pay a
penalty. Always check this.
2. Pay using a 0% interest credit card ensuring that the
balance is cleared before the 6 months end. This option
will also insure the item against any faults and in some
cases if it is lost or stolen (within a given period). This
will cost £166.67 pcm to ensure the balance is cleared
before the end of the term.
3. Pay using a credit card 24% APR. If you only pay
the minimum payment each month (2%) you will not
reduce the balance as you will be charged as much
interest as you have paid in a year, £240. Therefore
you will only manage to maintain the debt and not
reduce the loan; this can become a greater problem if
the interest rate increases. Naturally you can pay more
than the minimum payment and this will reduce the
original amount you have borrowed and the interest.
4. Alternatively, seek out a second hand laptop on eBay,
Freecycle or a local second hand shop but this will
come with a degree of risk – will the item work and
can I get compatible software etc.
Further advice or information?
The Compass and Student Advice
Student letters and appointments for face-to-face
advice and guidance www.kcl.ac.uk/advice
Student Funding Office King’s bursaries and
hardship funds www.kcl.ac.uk/funding
Local Citizens Advice Bureau
Details in the local phone book or newspaper
National Debtline
0808 808 4000
www.nationaldebtline.co.uk/england_wales/
Independent Financial Advice
www.unbiased.co.uk
www.moneymadeclear.fsa.gov.uk
Money Saving Websites
www.creditaction.org.uk
www.vouchercodes.co.uk
www.moneysavingexpert.com