What borrowing options are best for graduates?

By Benjamin Salisbury

post-grad-options

Managing finances as a student is difficult. For many, it's the first time they have been financially independent, and the cost of living can be a shock. On top of that, pressure to go out and socialise can quickly see funds dwindle. Many students also use student loans and student account overdrafts to fund their spending while at university.

When you graduate, the financial pressures grow. You can no longer borrow more through a student loan and - unless you return home to parents, who might let you live at home rent-free - you still have to pay for living expenses. Those everyday costs might include housing, utilities, socialising, groceries and others, depending on your post-graduate plans.

Without student loans, you may need a "grown-up" way of borrowing. Here are a few options to choose from:

1. Graduate bank accounts.
If you have a student bank account, it's likely your bank will convert this into a graduate bank account, as is the case with HSBC and many other banks.

"Once students graduate, their student accounts are automatically migrated onto our Graduate Bank Account," a spokesperson from HSBC said in an emailed response to questions. "If they have opted for a student credit, which has a maximum limit of £500, this card can be changed to a normal HSBC credit card."

You don't have to stay with the same bank, though.

"Many students tend to just go along with what their bank recommends, but all banks will offer different deals to graduates, so shop around," a spokesperson from the National Union of Students (NUS) said in an emailed response to questions.

With any graduate or non-student account, however, the interest-free overdraft you enjoyed with your student bank account will be gradually reduced. The bank will expect you to gradually repay this after you get a job. Try to repay your bank overdraft before the comfort blanket of the interest-free period ends.

With the interest-free overdraft gone, this option is likely not a smart way to borrow post-university, unless you can negotiate a low- or no-interest overdraft again.

2. Graduate loans.
Graduate loans are often available with graduate bank accounts and offer rates lower than the bank's standard rates. These loans can be a useful way to consolidate debts at a lower rate or fund some of the costs to set you up post-graduation.

"Students can apply online for an instant decision on a graduate loan with an interest rate representative 3.3% APR for loans between £5,000 and £25,000," said the HSBC spokesperson.

3. A credit card.
Perhaps the smartest way to borrow post-graduation is via a credit card - as long as you do so wisely. It's possible to find a credit card that charges no interest on purchases, giving you some breathing room to pay off your charges. Or, if you already have other debts coming out of university, you can possibly transfer them to a credit card with a lengthy 0% balance transfer period.

Try applying for a credit card with one or more of these qualities:

  • 0% interest on balance transfers. Once you get a job, see if you can qualify to transfer any high-interest balances to a 0% balance transfer credit card. There will be a balance transfer fee to pay on the debt, usually 2-3% of the balance you are transferring, but being able to pay back any existing debt without interest can lift a huge weight off your shoulders.
  • 0% interest on purchases. If you need to pay for things to set yourself up after graduation and have to put them on credit, use a 0% purchases card, which can give you up to 30 months to pay off the spending interest-free. Make sure you pay back the balance before the end of the 0% period, though, or you might see a huge interest rate spike that can set you back financially.
  • A low-rate credit card. You may want to avoid cards with enticing but temporary offers and simply select a card that offers an ongoing, permanently-low interest rate. This means you don't need to worry about switching to a different card when the introductory offer ends.
  • A credit builder card. As a recent graduate, you may have limited or bad credit. In that case, a credit builder card can help you improve your credit score so that you're more likely to qualify for a better deal in the future, whilst still giving you some credit to utilise for now.

Prioritise debts.
Once you start borrowing as a university graduate, you might find that you have student loans and new debt, and you might find funds stretched a bit thin at first, until you begin earning higher wages. If this is the case, prioritise your debts.

First, remember that you only begin repaying your student loan when you are earning £21,000 a year or more. The amount you repay, which is normally taken direct from your wages, goes up the more you earn above the £21,000 threshold.

Secondly, a student loan is a long-term loan at a fairly low rate, so it's not essential to try to repay it all quickly.

"Repaying your student loan early is fine if you have no other debts and you have the cash, but realistically, most students will have an overdraft or a credit card," the NUS spokesperson said. "These should be repaid before student loan debts.

"The main mistake is to treat all debts the same," the NUS spokesperson added. "Prioritise what must be paid against what you would like to pay."

See related: You've finished school. Now how do you pay for it?, Your guide to student finance, Two universities make credit card education priority

Published: 11 May 2017