How Smart Education Can Save Students from a Lifetime of Debt
As the nation’s students gear up for the start of their university life or a new term, it’s important that they don’t overlook their financial health. Financial education is as vital as any subject you may be studying, but a surprising number of young people are often unaware of how to manage their finances.
90% of people in England felt that they’d learnt “nothing at all” or “not very much” about finance at school. Yet, at the age of 18, we can apply for credit cards, student loans and overdrafts with no understanding of the implications or how they can affect credit scores and financial lives for years to come.
That’s why it’s so important for students to learn good financial habits as early as possible, to set themselves up with the financial tools, knowledge and confidence to manage their money throughout student life and beyond.
By taking the time now to make financial education a priority, you’ll save yourself from falling into unmanageable debt later on. It really is one of the most empowering things that you can do, and future you will be grateful for it. So, let’s dive into the key aspects of financial education to be aware of now:
- Understanding different types of debt and the distinctions between student loans and other types of borrowing
The transition from school life to university or further education is often the first time you’ll engage with taking credit in your own name. It is essential to grasp the differences between various types of credit and debt.
As soon as you turn 18, you’re of legal age to get credit and can apply for credit cards, personal loans, and other lines of credit. However, most young people heading off to higher education will opt for a student loan to fund their studies. Unlike other forms of credit which are offered by banks or other lending businesses, student loans come from the government.
Another difference is that most other forms of commercial credit require you to start making repayments immediately. But with a student loan, you only have to start paying it back from the April after you leave your course, and these repayments will only start if you’re earning more than the repayment threshold of £25,000 a year or £21,000 a year for a postgraduate loan.
- Credit awareness: understanding how credit scores work
The fact is that too many young people have no idea what credit is until it’s being offered to them. What you need to know is that while student loans do not impact credit scores, other forms of commercially available credit, such as credit cards and personal loans, do. So, knowing what’s involved with credit scores and what can affect them will be a good foundation for your financial future. Knowing how to get and keep a good credit score can save you thousands of pounds on credit cards, student loans, mortgages and other products as you progress through life.
Your credit score is a number generated on a scale of ‘poor’ to ‘excellent’, and it’s designed to help you understand how a lender may view you. A long history of good credit use is what will help improve your credit score and your chances of being approved for loans, mortgages and credit cards for example. Conversely, a thin file, or no credit history, could make lenders wary of offering you credit. Without an established credit history, it can be challenging to get a credit card.
The most important thing to remember is that whenever you borrow money, you need to pay it back on time – as missing repayments could harm your credit score and affect your ability to borrow in the future. Late or missed payments could be reported to credit reference agencies, and if you fall more than 90 days behind, it could leave a negative impact on your credit report for up to six years. That means, for six years, you could struggle to be approved for loans – things like getting a mobile phone or purchasing a house can become much more difficult due to just one small mistake.
If you keep on top of your credit repayments, you can maintain a good credit score, and even improve a poor one. With a good credit score, you will access better and more affordable financial products with lower interest rates and lower fees. Direct Debits and standing orders are easy to set up and are great for taking care of monthly repayments or financial commitments.
However, be cautious about applying for too many new credit agreements within a six-month period. Each time you apply for credit, the lender will conduct a hard credit search on you. Several hard credit searches on your file will harm your credit score.
- Loan repayment terms: how to familiarise yourself with the terms and conditions of any loans you take
Loan repayment terms refer to the terms and conditions involved when borrowing money. These terms can include the loan’s repayment period, interest rate, and any associated fees, including penalty fees you might be charged if you miss repayments and any other conditions that may apply.
When you apply for a loan, the lender should specify what the loan terms are, including monthly repayment amounts, before you sign the agreement. It’s really important that you take the time to review the terms and conditions carefully to check for any hidden clauses or fees that could potentially cost you. If there’s something in the loan terms with which you don’t agree, like a penalty fee or another clause, you can reject the loan offer.
If your loan payment is due on a specific date each month, you need to ensure you have enough money to avoid paying late and potentially damaging your credit score. An easy but effective tip is to set a reminder on your phone calendar app about your repayment days so you don’t lose track of when money is about to leave your account. That way you can ensure you have enough money in your account beforehand and not be subjected to late payment fees or overdraft fees from your bank.
- How to budget wisely and track spending to stay within your budget
Creating a realistic budget will help you to manage expenses and avoid unnecessary debt. Sticking to the budget gives you peace of mind that you have enough money to cover the basics, emergencies, and save for any long-term goals you have for the future.
Understanding how your emotions can influence your spending decisions can help you to avoid overspending and make sure your money is used wisely. That’s why having a budget and setting financial goals can be a powerful tool for making good financial decisions both now and in the future.
It’s also important to build up a savings buffer. Savings start with a thorough understanding of what’s coming in and what’s going out every month, and it can help you identify areas where cutbacks can be made. Avoiding unnecessary spending is key to sticking to a budget. Before making a purchase, ask yourself if you can really afford it without going into debt, and whether it’s something you truly need or just want to have. This mindful approach to your spending can help you to stay on track.
Seeking financial guidance: how to utilise university resources
Many further or higher education institutions offer counselling to students facing financial difficulties and student financial support teams. To access these resources, check your institution’s website or get in touch with student services or the financial aid office. You can also get lots of valuable advice from organisations like StepChange or Citizens Advice.
Using financial tools: how to take advantage of budgeting apps and financial planning tools
There are lots of personal financial management tools and apps available from banks and other providers that can help you set money aside into specific savings pots. Using tools like these is a really easy way to build up those all-important savings and financial buffers.
Loqbox has created several smart personal finance tools, giving people the opportunity to build their credit histories and access financial products that they may have previously been out of reach. Today, Loqbox has empowered more than one million members, including young people and students, to take control of their finances, save and build their credit scores.
Financial education is key in helping students to start off on the right foot and seize future financial opportunities. By equipping students with knowledge about interest rates, repayment terms, and the impact on credit scores, we can foster a generation of financially savvy individuals prepared to navigate their financial futures with confidence.
By Gregor Mowat, Co-CEO and Co-Founder of Loqbox
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