In the coming weeks, hundreds of thousands of excited 18-year-olds will be heading to university. It is daunting for both the new generation of undergraduates and their parents.
University will be a long list of firsts – and many of these will involve money. Having a bank account with an overdraft (and very likely the offer of a credit card, too) will be just the start. There will be rental contracts and deposits, student loan borrowing and, for some, the eye-opening experience of doing a grocery shop.
Many 18-year-olds will never have budgeted properly in their lives, and having to meet essential food, housing and other costs could come as a shock.
Helen Saxon, the chief money analyst at moneysavingexpert.com, said: “They’ll need to sit down – and maybe parents can help in these remaining weeks – and work out how much cash they’ll have coming in, including their student loan, anything parents are giving them and any earned income from work.
“If parents impart one tip to their son or daughter, make it this: don’t spend everything at the outset. They may want to join every university society, but unless they’ll be doing paid work during term the money they have at the outset needs to last.”
Ms. Saxon said it would be helpful to plan their spending in terms of weeks or months. It’s important to point out that spending on socialising is fine – and a big part of university life – but it needs to be affordable.
The allure of an overdraft
A student bank account with a 0pc overdraft can be an incredibly useful safety net. But the dangers of an overdraft – which can seem like free money – are obvious.
Ms. Saxon said treating the overdraft as a “buffer” rather than accessible funds is imperative. “That overdraft is a safety net, and needs to last all year,” she added. “While 0pc overdrafts are useful and should help with cash-flow, they should not be treated as available funds. An overdraft is a loan that must be repaid.”
Telegraph Money’s favorite student current accounts are the Santander 123 account, which pays 3pc interest on balances between £300 and £2,000, and Nationwide FlexStudent, which has an overdraft rising to £3,000 by your third year and pays 1pc on credit.
The HSBC student account is great for freebies – it comes with a £60 Amazon voucher and a year’s free membership to Amazon Prime, but pays only 1.5pc on credit balances.
Unless their parents are wealthy and generous, most students will have cash crises at university – and a credit card could seem the answer. It’s incredibly important, however, to make sure borrowers understand that credit isn’t interest-free in the same way as a student overdraft.
Highly organized borrowers can make use of credit cards and, by paying them off soon enough, avoid costs while benefiting from the perks – but that’s a steep ask of a student.
The HSBC Student Visa Credit Card, connected to the student account (see above) provides up to £500 of credit with an interest rate of 18.9pc. It also offers cashback on some purchases, and the chance to win NFL tickets.
The Nectar Low Rate Credit Card, offered by Sainsbury’s, has an interest rate of just 5.94pc with a credit limit of £1,200. The student can collect Nectar points too, which could help them save on the weekly shop.
Understand your student loan
Getting to grips with this controversial and complex arrangement now could help indebted graduates down the line.
In the post-2012 student loans system, those graduates earning less than £21,000 (the threshold for repayments) are charged interest at RPI, currently 3.1pc. Those earning more than £41,000 are charged RPI plus 3pc – so 6.1pc – with a sliding scale in between.
Bizarrely, the maximum possible interest applies to the debt while they are studying, meaning that it will do nothing but grow. Student debt is cancelled after 30 years of repayment, so for many the size of the ultimate borrowing will not be relevant.
Safeguard your credit rating
Numbers disclosed by Telegraph Money last month showed that the typical student has a credit score 15pc lower than the national average.
While a student loan won’t show up on a credit report, other outstanding debts do so loans and credit cards need to be managed. ClearScore, the firm behind the research, found a quarter of students have a personal loan.
A quarter of students had also admitted to defaulting on a debt – most likely a mobile phone contract – and this too can wreak havoc. Regularly spending on a credit card while paying it off can actually help a credit rating. But using it to fund their lifestyle could land them in hot water.
The easiest trap to fall into is with utility bills. Half of students reported being listed on bills alongside housemates. In most cases, providers won’t treat you as financially linked, but if you set up a joint bank account to pay bills then a default could hurt your credit rating.
Ewan Armstrong, 20, a human biosciences student at Exeter, shares his experience
I decided not to have an arranged overdraft when I started uni a year ago: I have always dreaded feeling indebted. Instead, I keep a buffer of at least £100 in my account as a self-imposed overdraft that I promise myself I will never touch.
I have friends who’ve developed the terrible habit of refusing to check their account balance. This out-of-sight, out-of-mind mindset will catch up with them in the long run. I look at my balance and account summary on the NatWest app every other day.
A recent phenomenon among students is Monzo cards. It’s a debit card but one that tells you how much you’re spending on groceries, eating out, transport or bills.
I make most of my transactions via contactless or Apple Pay on my phone. Not even needing to enter a Pin runs the risk of making it easier to spend more, and I have found myself leaving the supermarket having paid contactlessly and not knowing exactly what I’ve spent.
Even so, I think the danger of thoughtlessly paying via contactless is offset by how using cards makes it easier to track spending.
There’s a perception that students can’t or shouldn’t invest money. But without a doubt the money-related achievement I’m proudest of is finding an app called Moneybox.
It rounds your card purchases up to the nearest pound and invests the pennies into a fund depending on your stated level of risk (for example, it invests 15p after you buy an 85p coffee). It has seamlessly invested about £1 a day for me over the past year. Aside from being an easy introduction to the world of investing, finding £300 tucked away in an app is every student’s dream.
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