University. Three years of fun and freedom for your (not so) little angels.
There’ll be plenty of learning going on too, both academic and general life lessons. But how will these years affect their financial future? Living on a student budget is notoriously difficult, but if they aren’t careful, eating instant noodles every night will be the least of their worries…
Managing money carefully may not be near (or even on) the list of priorities for the average student. However, the consequences can be far reaching, from difficulty getting credit later in life, to being unable to buy a home altogether.
Leaving university with a qualification is a great achievement. But, leaving with a clean credit history is something they will be extremely thankful for in years to come.
What should my child look out for?
1. Delayed payments
It is easy to see why many people are financially unprepared for a student lifestyle. They go from having relatively little or no money, to receiving large lump-sums of money throughout the academic year (providing they take out a student loan).
Many aren’t used to budgeting, and it can be easy to overlook the monthly bills that they have, such as:
- Rent
- Utility bills, if they aren’t living in halls
- Food
- Phone
- Insurance
- Motoring costs if they drive
Not setting aside enough money to cover these may not seem like a big deal, but the consequences can last for years. That’s because your payment history, as well as CCJs and defaults, stay on your credit record for six years. If your child leaves university at 21 or 22 that means a record of their financial mismanagement will be with them well into their late 20s. Exactly when they will probably be looking to step on to the bottom rung of the housing ladder.
You can help your child avoid late payments, CCJs and defaults by:
Working through your son or daughter’s monthly expenses with them before they go
• Assess their phone contracts; do they really need such an expensive plan?
• Helping them to set up direct debits to stop payments being missed; this is especially useful to ensure the minimum payments are made each month on credit cards
• Ensuring they know the importance of not missing a deadline and the consequences this could have
• Receiving bills by email. Students are more likely to keep the same email address during their time at university than they are a postal address. Asking for bills to be sent by email increases the chances of them being received
2. Hard searches
A loan can seem like a great idea to a student if they are short of cash. But even the act of applying for a loan can put them at a disadvantage. Regardless of whether they are accepted or not, the fact an organisation has run a credit search on them will remain on their file.
The more credit searches that appear on someone’s file, the more nervous lenders will be, worried that someone is being regularly turned down, or, conversely, that they are taking on too much credit.
Before considering a loan, students should ask themselves:
- Do they truly need it?
- What is their current credit score? Is it worth them even applying?
- Are there any alternatives? Could they get a job? or a better job? or borrowing from family?
3. Payday loans
Payday loans are controversial, with many calling for tighter regulation. Hardly surprising when interest rates approaching 3,000% APR are often the norm.
Worryingly, nearly a quarter of UK students report having taken out a payday loan. Having a payday loan on your credit history will not be viewed positively by future lenders, so educating your child on the dangers (not least the sky-high interest rates) could help them significantly in the future.
4. Student loans aren’t free money
Almost all students leave university in debt. In fact, the Institute for Fiscal Studies now believes the average student will leave university with a debt of £50,800. Students for poorer backgrounds will leave with an average debt of £57,000.
The interest rate for student loans is currently 6.1%, which is relatively high compared to other forms of borrowing.
Student loans are repaid at a rate of 9% of salary for earnings over £21,000. Therefore, although having a student loan won’t affect your son or daughter’s credit rating, the repayments will eat in to their disposable income and consequently the rent or mortgage repayments they can afford to make.
5. Credit Cards
Many student bank accounts will come supplied with a credit card. This can be useful in the case of an emergency, but can be the complete opposite if misused.
High balances, breaching credit limits and missing payments will all appear on your credit record. It’s therefore vital you:
• Reinforce the importance of budgeting to your child
• Encourage the use of a credit card for emergencies only
• Set up a direct debit to ensure the monthly minimum payment is never missed
6. Bills
Utility bills can be deceptively problematic for students. On one hand, they are a necessity. Water, gas and electricity are by no means a luxury, but care should be taken when setting up the accounts to avoid any issues in the future.
It is common for groups of students to share a house, but the bills are usually taken out under one person’s name. If any payments are delayed, this person will be responsible. If this is your child, ensure that they know the importance of what they are taking on. Make sure they:
Keep information up to date; especially if they move to a new house each academic year. It’s been known for students to incur CCJs because the bill never caught up with them
Set up direct debits
Use a common billing address for the account (your address for example)
7. Ignoring the electoral role
Besides being an opportunity to have their say in how the country is governed, being on the electoral shows initiative.
It starts to show lenders your child is responsible, when lenders are doing credit scores it’s a positive mark against your name.
Time to chat
There are certain ‘awkward’ conversations you will have had with your children over the years, but money shouldn’t be one of them.
Before they head off to university, it’s worth sitting down and explaining the importance of budgeting and taking money management seriously. Avoiding some of the common mistakes students often make will mean their ambition of owning a home, after they have graduated, won’t be met with hurdles and obstacles.