Thursday, 31 March 2016

Cure the debt hangover from your student days

As the heady days of student life become consigned to the realm of nostalgia, it’s time to pick up the tab.
Reality might begin to bite when you find yourself landed in thousands of pounds worth of debt, money flowing out of your account that you cannot keep track of, and a credit history tarred from years of abusing credit. However, there are some quick and easy steps you can take to get your finances back on track.
Clean up your overdraft act
While your overdraft may have seemed like your best friend during your student days, now you are no longer studying it is likely to be more of a curse, particularly if it has become a permanent state of affairs.
Most student current accounts give you a grace period of a year or so to pay off your overdraft before hefty interest rates and other charges are added, so you will need to act before it starts costing you dearly. But how?
Cut the cost of your balance in the red
To do this, you essentially have two options:
1.    Transfer to a new overdraft account – the aim here is to get an account that will accept your outstanding overdraft and make it cheaper or, ideally, interest-free while you work on paying it off.
If you are a recent graduate, you should first look at switching to a specific graduate current account – this does not necessarily have to be with the same bank as your student account – as most offer interest-free overdrafts for two or three years after you graduate.
If it has been a while since your student days but you have never made it out of your overdraft, a standard current account with an interest-free overdraft is worth considering. Alternatively, you could look at moving the balance to another interest-free home, such as a balance transfer credit card.
2.    Transfer to an interest-free credit card – 0% balance transfer credit cards which offer money transfers could help you to significantly cut the cost of your overdraft balance. Using one of these cards, you will be able to pay off your overdraft balance by moving the debt onto the credit card. You will then be able to work at paying it off without any more interest being added.
Of course, the biggest drawback of using a 0% balance transfer card is that the interest-free period will only be temporary, often between three and 18 months long. If you have not cleared your overdraft by the time this deal is up, you will need to move the balance again. You will need to pay a handling fee (usually around 2-3%) each time you shift your balance too.
If you don’t fancy having a time limit imposed on you, you could consider moving your overdraft debt to a lifetime balance transfer card. Lifetime balance transfer cards will apply a low rate to your borrowing until you clear the balance, however long that takes.
Clear the balance
Once you have your overdraft balance cornered on an interest-free card or current account, you can work on clearing it for good so that part of your student debt hangover is wiped out.
Read our article on clearing the balance on your overdraft for more information.
Sort out the state of your credit cards
It may be that you ran up thousands of pounds worth of debt on credit and store cards while you were at uni, and it is only now, as you begin to look at the state of your finances, that you realise just how much you've spent on them during the last few years.
Again, the best course of action is to simply pay these off if you have the means to, but as you are unlikely to have a spare £1,000 laying around in the post-student fallout, your options are to make the credit card balances cheaper by transferring them elsewhere, then working on paying them off over time.
Prioritise outstanding loans
If you took out a personal loan while you were a student, you will have to look at how to make this cheaper too by paying it off or transferring the balance to an interest-free home. However, these are a little trickier and you will have to look at the loan terms carefully to avoid being charged for paying off the loan early, for example.
Figures like this can be alarming to say the least, especially when you barely have enough in your pocket for basic living expenses. The best thing to do about this whopping loan is not to worry too much about it.
Firstly, you will only have to begin paying back that loan when your earnings exceed a certain threshold (currently £21,000 per annum). At that point, a relatively small amount will begin to be automatically deducted from your wages and put towards paying off your student loan.
It is also worth noting that your student loan is likely to be the cheapest loan you will ever receive. Read our guide on whether or not you should pay off your student loan early.
Another outstanding loan that might be on your mind is money that was lent to you by family and friends during the course of your studies. Hopefully this will not be accruing interest, which means it’s not a priority to pay off if you have other debts that are not interest-free, but you should still work on paying it off as soon as possible if you want to stay on the right side of your nearest and dearest.
Tidy your credit report
This could be the first time in your life that you have thought about your credit report, and it is essential to get it in shape so you don’t have problems in the future with getting credit when you really need it – getting a mortgage for example, or financing a new car.
Moving around a lot while you are a student, as well as missing payments on credit cards and racking up debt in your overdraft, can mean your credit report comes out of the whole experience a little worse for wear.
As such, the first thing you should do is check your credit report. This will show any defaulted payments from the last few years, as well as the last addresses you are recorded as having lived at.
Check all the information is correct – for example, if you see an address listed that you have never lived, at or an account opened in your name that has nothing to do with you, you should contact the credit agency and inform them of the right information.
You can then start taking steps to rebuild your credit rating and to create a solid credit history. Obviously this will mean making all future credit payments on time, whether that is on your mortgage, a credit card, or a personal loan. You can also do things to make yourself look like more of a 'stable' borrower by registering to vote – read our guide for more details on how to improve your credit rating.
Source: money.co.uk

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