Tips for clearing graduate debts

More than 200,000 students will graduate this summer, many thousands of pounds in debt. This is when the journey of repaying that money begins.

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It often takes years to be debt-free after university and there will be times when you never think you’ll reach the end of the tunnel. But you’ll get there in the end and with a bit of careful planning you can keep interest down to a minimum.

Current accounts

Just as banks fight for the custom of first year students, the graduate market is also highly competitive.

The favourable terms students enjoy don’t end on graduation – the main high street banks also offer graduate accounts. Given that most students leave university overdrawn one of the most attractive features of these accounts is the fact they continue to offer interest free overdrafts.

If you’ve had a student account, your bank will automatically change it to a graduate proposition. However, many new graduates, particularly those with overdrafts, wrongly assume that they have stick with the same bank they had their student account with – that’s not the case. Banks will accept new customers, and their overdraft debt, so it’s well worth scouring the market to see if you can get better terms elsewhere.
                               
NatWest, Royal Bank of Scotland, Lloyds TSB and Abbey, for example, are among the most generous with their graduate offerings. They all provide an interest-free overdraft facility of up to £2,000 for three years for graduate customers.
                
Barclays and HSBC, in contrast, offer up to £1,500 interest-free for three years.

In most cases the maximum you can borrow without incurring interest reduces each year. Lloyds TSB for example, reduces the 0% limit from £2,000 in the first year after graduation to £1,500 in year two and £1,000 in year three. The reason for this is to encourage you to bring your borrowings down gradually.

Repaying an overdraft requires self-discipline because it can be all too tempting to keep on spending up to your limit. Many people, if they had the facility to borrow up to £2,000 interest-free for three years would borrow up to or near the max. Then when the favourable terms end they’re stuck with a huge overdraft, being charged interest at a really high rate.

Tip: It sounds boring but set yourself a repayment target and aim to bring your overdraft down by a little each month with the intention of clearing your debt by the time the interest-free terms on your graduate account end.

DON’T exceed your interest-free overdraft limit. The standard overdraft rates charged by the banks offering graduate accounts are significantly higher – Abbey charges 9.9%, while Natwest charges 17.81%. These are the rates that you’ll be charged if you have permission to extend your overdraft – exceed your limit without prior authorisation and you’ll be charged even more: Royal Bank of Scotland’s unauthorised rate is 29.84%, for example. You’ll also incur penalty fees which can easily mount up and may result in your debts spiralling out of control.

Loans

Graduates can also take advantage of some preferential loan rates – these are linked to the graduate current account so you will need to borrow from the bank you have that with, but if you’ve racked up additional debts during your student days, perhaps on store cards or similar, it could be worth consolidating them on to a graduate loan. HSBC, for example charges a typical annual percentage rate of 8.7%.

If you borrowed student loans while at university, repayment of these will be handled automatically by the Student Loans Company – repayments are taken via the tax system. The money is deducted from your monthly salary once you are earning £15,000 a year or more.

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Don’t ruin your credit score

If you’ve just left university for thousands of pounds in debt a mortgage is probably the last think on your mind. However, it’s important to think about what you may need in the future – particularly if it’s borrowing of any form.

Your credit score could mean the difference between you getting a mortgage, car loan, credit card or even a mobile phone contract and not. That means a priority as you embark on repaying the cost of student life, is ensuring your credit score remains intact. There is nothing wrong with borrowing as long as you do it responsibly and are able to prove that you can cope with credit.

As a result you must therefore make sure that you keep on top of your finances. If you miss any loan or credit card repayments; or frequently exceed your agreed overdraft limit without authorisation it could seriously affect your ability to get new credit in the future.

Seek advice

If your debts are unmanageable seek help as soon as possible. The Citizens Advice Bureau and Consumer Credit Counselling Service offer free debt advice.

What if I’m not in debt?

Some people are fortunate enough to graduate without debts. If you are one of these then, as well as being the envy of your friends, you’ll also have a wider choice of financial products to choose from.

When it comes to current accounts, one of the specific graduate accounts may not be the best option as most pay little, if any, interest on balances in credit – Barclays and HSBC pay nothing and Royal Bank of Scotland has the highest rate, but that is just 1.02%.

However, you could earn 6% with Alliance & Leicester’s Premier Direct account, which is fixed for a year. There is also an interest-free overdraft for the first 12 months. However, you must pay at least £500 in to the account each month so this account is probably only suitable if you have a job, or other source of income.

Alternatively, the Halifax Reward account pays £5 each month – this is instead of interest. Again though you must pay money in every month and the minimum deposit is £1,000 so this is another account aimed at those in employment.

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