For many students, going to university for the first time means the start of financial independence. Very few students have the means to fund their studies in cash, and most will rely on student loans, overdrafts, or credit cards. Although this sort of borrowing is often essential and shouldn’t always be taken as negative, it’s important to understand how borrowing as a student can affect your credit score and what steps you can take to secure a healthier financial future post-graduation, when you might be thinking about taking out a loan for a new car, or applying for a job which requires a pre-employment credit check. Here are some key points which every student should know about credit:
Student Loans Do Not Affect Your Credit File
Unlike other debt, student loans, regardless of their amount, will not appear on your credit file. So, when you are applying for a credit card or loan, lenders won’t find out about student loan when determining whether to offer you credit.
Affordability Checks
Affordability checks are usually done when applying for a large amount of credit, such as taking out a mortgage. It’s a way of the bank ensuring that you are not overstretching yourself financially, and taking on more debt than you can comfortably afford. Student loan repayments can influence mortgage affordability checks, as these are classed as a household expense or commitment. Lenders look at your ability to make mortgage repayments given all your other outgoings, considering not only current rates but also potential interest rate increases.
Overdraft Use
Most student current accounts will come with an agreed overdraft facility, and staying within that means you will not be charged any interest. Using an “unarranged overdraft”, or spending beyond your agreed overdraft limits, can negatively impact your credit score. Staying within your arranged overdraft limits is essential. Student unions and your bank can give financial advice and debt counselling to students who are struggling to manage their money.
Improving Your Credit Score as a Student
Students who have just moved out of their parents’ home into university accommodation have no credit history of their own and can find it very difficult to get credit at all – not because they have done anything wrong, but because the lenders have no information about them at all. It can be a good idea to apply for a credit card even if you don’t really need to use it as paying off your balance in full each month shows that you can manage credit responsibly. If you are in a shared house where you and your flatmates are responsible for paying the bills, then getting your name on the gas bill or internet contract will also help build your credit score. Registering to vote – either at your home or term time address – will also instantly improve your credit score. There are lots of apps and websites on the market which will let you sign in and see your credit score and get tips about how to improve it.