Comment: does the credit crunch affect students?

This time last year, no one predicted the credit crunch and there is little evidence of how it will really pan out for the rest of the year. However, property prices have fallen by 2.5% and thousands of homeowners face falling into negative equity or huge rises in their monthly repayments as fixed rate mortgage terms come to an end this year. But does the credit crunch affect students and, in if so, how?

How much does it all cost?

During a three year course a typical student can expect to spend between £39,000 and £45,000. So how do students fund this? The lucky ones get help from parents but many will turn to credit cards to help top up their student loans, etc. And this is where the credit crunch is going to start to have a real impact.

Many of the leading consumer banks and credit providers have tightened their lending criteria for all sorts of credit – from credit cards and mobile phone agreements to mortgages. And they are looking in more detail at consumers’ credit information - basically your credit profile - for signs of possible future difficulties. In particular, having several credit cards with high limits may ring warning bells. Simply having a relatively high number of credit cards, more than four or five, may also be of concern to some lenders. Even those who never miss a payment could be refused credit.

Your credit profile and what it means

You may not think this affects you, but if you’re planning to get a credit card, a mobile phone contract or even buy your own place your credit file will be checked. Without a strong credit rating, especially in the current economic climate, you could find your application is declined.

To make sure you are in a good position to be granted credit it is worth taking the following steps to build or improve your credit profile:

1. Ensure you’re registered on the Electoral Roll at your current address. A lender will use this as confirmation of your identity and proof of the address details you have provided.
2. If you find that you have been declined credit, speak with the lender to find out why but do not approach other lenders. Instead get a copy of your credit file to asses the information held on you.
3. Avoid carrying a balance on credit cards that is more than 30% of your credit limit. Lenders may view this as excessive debt and that you may not be able to keep up with repayments.
4. Make sure any accounts you don’t need or use are closed. Financial companies are paying more attention to the total amount of credit available to an individual and whilst you may not be using them, dormant accounts could affect your credit score.
5. It’s easy to forget a payment so setting up direct debits and standing orders with your bank will ensure payments go out on time.
6. And if you have never applied for credit before it is always best to approach your bank where you have probably already built up a positive relationship.

Undergraduates – Start managing your finances today

If you are only going into the first or second year of uni, dealing with loan repayments, getting a mortgage, etc. may seem way off – but financial decisions you make now will affect you later on. So don’t think a late payment on a credit card won’t make a difference!

Graduates – How to manage your finances

The financial pressure can be really daunting when you graduate. The credit card bills keep coming in, yet you still haven’t found that perfect job. Don’t panic though, just get your finances in order – you’ll be surprised how much more in control you’ll feel after. Here are a few tips:

1. Ensure you pay off your credit cards first. You have a year’s grace before you have to start paying back your student loan.
2. Make sure you pay credit card bills on time and do not exceed the limit.
3. Always try to pay off more than the minimum each month.
4. Always use extra money to pay off the debts with the highest interest – that’ll be the credit and store cards.
5. Look for low interest charges or cards offering interest free for the first few months.
6. If you have moved around while at university ensure all your bills are re-directed to your current address – this will prevent you becoming a victim of ID fraud.
7. Ensure any joint agreements you had with university friends have been settled.

Bankruptcy isn’t the easy way out

And if you are considering declaring yourself bankrupt think again, it’s not an easy option! Here are the stark facts:

"Bankruptcy’s free." Wrong. It costs £450 and it’s cash only!

"Don’t worry, it’s a secret." Wrong. Bankruptcy orders are a matter of public record.

"Bankruptcy only lasts for a year." Wrong. The bankruptcy may be discharged after a year, but the fact a person has been bankrupt is held on their credit file for six years. It is crucial to realise that bankruptcy can have quite a long term impact on your life.

"It won’t affect my job prospects." Wrong. Going bankrupt could affect future career opportunities, especially in the financial and legal professions and the public sector.

And: Student loans will not be written off through a bankruptcy

What to do if debts are becoming unmanageable

And if it is getting all too much don’t bury your head in the sand, it’s important to deal with debts immediately.

Equifax advises contacting your lenders direct to discuss the situation – do not approach a ‘credit repair’ agency who will charge you a fee for something you could do yourself.

Obtain a copy of your credit report from Equifax (www.equifax.co.uk)

If you feel you have got into too much debt, lock away credit cards. But don’t cancel them. If you have a low credit rating, you may have trouble getting new cards or other credit at a later date

If you really feel you can’t cope with debts contact a money advice organisation such as the Citizens Advice Bureau, CCCS or National Debtline

For more information on debt and money management or to get a copy of your credit file visit www.equifax.co.uk

Neil Munroe is external affairs director for Equifax