Having difficutlies with debt is not unusual and yet it is something few people talk about. If you are in debt and are struggling to cover essential costs, please don't keep it to yourself. Speak with an Adviser at the Advice Place. We can help you maximise your funding and support you in accessing expert help with your debts.
For most students being able to afford to study involves borrowing money. Borrowing money to further your career and education is considered a ‘good debt’.
Put simply, a good debt is one that should leave you better off in the long term. You should have a clear and realistic plan of how you will repay the debt and it should not negatively affect your finances long term. You should always identify the cheapest way to borrow money, this will involve considering things like the interest rate, any fees and any penalties for late payments (especially if you think there is a high risk this will happen). If you are not sure how to work out the costs of borrowing please do come and see us so we can help.
Examples of good debts might include-
Interest free student overdraft
Emergency loans from the Advice Place that are fee and interest free
Bad debts are debts that you have no realistic way to pay off and will probably not leave you better off financially in the long term. They may also not be the cheapest way to borrow money and they are often pile up as a result of buying things we don’t need or not shopping around to the best option to borrow money.
If you are not in employment, or have only recently turned 18 then you may find the interest rates you are quoted to be offered credit are much higher.
Examples of bad debt might include
Store cards are usually offered to you at the till in a shop with an introductory offer, they are like a credit card but for one specific shop. The interest rates are very high, much higher than any standard credit card and the cost accrues very quickly. If you can’t afford to buy something without putting it on a store card then then the best option is to consider if it is vital that you buy it, if it is then explore cheaper ways to borrow the money. If you already have store card debt that you can’t afford to pay off you may be able to transfer the balance to a 0% interest credit card. Credit cards often have this as an introductory offer (if you do use this option you must ensure you can then pay off the balance before the interest free offer period ends).
As the name implies, payday loans are designed to get you to next payday. In 2015 the interest rates they were allowed to charge was capped at 0.8% a day and the default fees cannot exceed £15, you should never have to pay back over double what you borrowed. Despite these caps in almost all circumstances, payday loans are not a good deal. If you are not sure how to calculate how much a loan from them you can use a calculator to help you. Bear in mind this will only tell you how much it will cost if you pay your loan back on time—the costs will be much higher if you are late repaying the loan.
Borrowing £100 for a period of 1 month
Wonga 1509% APR total cost £124.80
Credit card 35% APR total cost £102.53 (credit card interest rate based on a card available someone with ‘poor’ credit history
The difference between a debit card and a credit card is that a debit card withdraws money directly from your account as you spend it and a credit card is a way for you to borrow money from your bank. Many people use credit cards and there are many ways to use them without getting into bad debt. As a rule they should be paid off each month in order to avoid accruing interest on your debt. If you decide to use a credit card, make sure you shop around for the best deal. Some have rewards schemes and others offer 0% interest on balance transfers—the one that is best for you will depend on your situation. Sites like moneysavingexpert are a good place to compare the deals and to read about how they can make them work best for you.
A bad credit card debt would be spending money on your credit card that you have no way to repay and then just paying off the minimum interest each month. This will not reduce how much you owe and will end up costing far more than you originally borrowed.
Paying back debts
If you find yourself in debt that you do not feel it is manageable to repay, the most important thing to do is seek help straight away—do not ignore it. Many expert debt advice services can help. You can also contact the Advice Place who can help you gather what you need to get in touch with a debt service.
The Money Advice Service has a great Debt Advice Locator and some of the services listed are 24 hours a day.
Most creditors (people that you owe money to) will want to see a breakdown of your budget when you ask for a repayment plan and debt advice services can help you with that.
For information on budgeting apps see our budgeting page.
What about my credit score?
A credit score is a way that a company will assess the risk of lending you money or starting a contract with you (for example a monthly mobile phone contract). There is not a set way that all companies assess your credit score as every lender does it slightly differently. Companies offering to run a credit check for you can only do so based on their algorithm and it is no guarantee you will pass a credit check with another company.
People with a good credit score tend to have:
- -paid all their bills on time
- -registered on the electoral roll
- -not moved house lots of times in a short period
- -been accepted for credit when they applied
For much more detailed advice on this we recommend this site
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