Tuesday, 25 June 2013

How Graduates Can Manage their Debts the Smart Way

With news that private investigators are being called in to track down EU students who've reneged on their debts and worries about a 'lost generation' who are starting out with a spiralling debt and grim employment prospects, many recent graduates are understandably concerned. Here's some tips on how you can pay off your debts responsibly...

Watch your spending
You've toiled away for years in the library, subsisting on baked beans and more cheap mince than you care to think about. So when you finally start your first proper job which recognises your many talents, it's tempting to rush out and start treating yourself to fancy suits, gourmet lunches and nicer wine.

But graduate salaries aren't what they used to be and many young people aren't commanding the sort of wages they might have expected. And with living costs so high, you may find that your pay check doesn't stretch quite as far as you would think. You don't have to start paying your loan back until you earn at least £21,000, but for every day that passes after you graduate, your borrowings will be mushrooming as they accrue interest. Try to set as much as you can afford aside to pay off your loan and psychologically settle into a period of relative austerity. Ensure you pay back more than the minimum amount each month. Small lifestyle changes like taking your own coffee and lunch to work or cycling instead of paying for a car can make a huge difference.

Pay off your loan versus saving your money
Some graduates make the mistake of spending their savings and earnings too quickly to pay off their borrowings, and when financial emergencies strike they are left with little option but to take out a high interest commercial or pay day loan. It's important to do your sums right and be realistic, leaving yourself a nest egg which you can rely on when you're planning your finances. The interest rate you pay on your loan will depend on when your course started and this will help to calculate the best place to put your money. If you can put your savings in a high interest ISA, you may want to do that instead of making additional loan repayments if your loans aren't costing you as much as you would save.

Use credit cards wisely
While your loan from the Student Loans Company won't affect your credit rating, your overdraft and commercial loans you took out whilst studying however will. If you find the right credit card it could help you build up your credit history, a wise move in getting your financial standing in good shape.

The main thing to remember when owning a credit card is that you should never use it to spend more than you make and have. That's a sure-fire way to get yourself into even more debt. Instead, save up for something you want, pay for it with your credit card and pay the balance off immediately. Over time, this will help repair your tarnished credit history and your track record of paying back bills will make you a lot more attractive to a mortgage lender.

Don't get overwhelmed by debt
While saving is to be encouraged, you’ve worked hard to get through university and should allow yourself the odd treat here and there. Whilst you should be mindful of your borrowings, it’s important to remember that your life won’t be permanently on hold while you pay off your debt – doing so could have you feeling very down. If you need someone to talk to, seek out a registered debt charity and avoid paying for advice.

Living with mum and dad
Graduates coming out of university in the past few years have been labelled the 'boomerang generation' because they've gone from enjoying a taste of independence to having to move back in with their parents. While not an ideal situation, the money you'll save on rent, bills and food can be ploughed straight into paying off your debt as quickly possible. For a little bit of temporary pain, you could be debt-free in a short time so when you do venture out on your own, you'll be unburdened by debt.

Prioritise your payments
63% of the debt that most young people have are from student loans, with personal loans (23%), money borrowed from parents (18%), overdrafts (19%) and credit card debt (31%) making up the rest. If (like many students) you took out commercial loans or use credit cards while you were studying, prioritise paying them off first if they have a higher interest rate. Have a frank and open conversation with your parents to work out a payment arrangement that suits everyone, as they may have debts of their own to pay off.


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