All About Credit: For Students and Graduates

Building credit isn’t a piece of cake! Here's a short guide to understanding and improving your credit score as a student and graduate.
Credit Score

Post university, your future will be full of new possibilities, opportunities and adventures, and along with it, some financial milestones. From a new career and first ever paycheck, to a brand new car or even a new place to move into. However, this may not be smooth sailing if you don’t keep on top of your finances and have a minimal credit history. Lenders, insurers, and even employers often rely on credit history to assess your financial responsibility. For this reason, becoming educated in personal finance management now is a great idea.

Here at Pave, we understand that financial education is not accessible to everyone and nor is it emphasised at university. So we’ve compiled a short guide to understanding credit scores.

What is Credit? What are Credit Scores?

In the world of finance, credit is a contractual transaction between two parties whereby one party (the lender) supplies money, goods, services or securities to the other party (the borrower) for a promised payment in the future. In the world, credit is the act of borrowing money to fund something now with the promise to pay back later. Often with a finance charge attached.

Simply put, credit refers to your borrowing. It becomes an important part of your financial power and can dictate your financial future post graduation. 

A credit score is simply a numerical figure that signifies your borrowing capacity, or creditworthiness. It is a grading system used by banks and building societies to determine the amount of money you are qualified to borrow. Credit scores are important because they could affect your ability to get a good interest rate and qualify for a multitude of things, including credit cards, personal loans, mortgages, car insurance, mobile phone contracts etc. For these reasons knowing your credit score is important. 

A ‘good’ credit rating signals a reliable borrowing record and credit history, installing a sense of confidence in lenders. This makes you an attractive candidate for the best offers available. A ‘bad’ credit rating suggests a history of missed repayments, debt, or simply lack of a credit history. Lack of trustworthiness and punctuality may deter lenders. 

Read more about The Average Credit Score in the UK & How to Check and Improve Your Credit Score.

Do Student Loans Affect Your Credit?

Fortunately UK government student loans don’t affect your credit score nor appear on your credit report. However when applying for finance in the future, mortgage lenders may ask about your student loan repayments in the application process. This criteria may be used to establish your eligibility for a mortgage and estimate the amount you could borrow in the long-run. 

Remember that student credit cards and a student overdraft will appear on your credit report.

Does a Student Overdraft Affect Your Credit Score?

The majority of banks and building societies offer students interest-free overdrafts. Sometimes called ‘planned’, ‘authorised’ or ‘agreed’ overdrafts with a pre-arranged amount that you’re allowed to ‘borrow’. An overdraft appears in your credit reports however it does not directly affect your credit score as long as you’re careful with it. Meaning, staying within your agreed overdraft limit, not incurring extra charges and if so paying them in a timely manner, and switching to a graduate account accordingly. Going over your pre-arranged overdraft limit on a regular basis can have a negative impact on your credit score as it signals to lenders that you have poor money management skills. So keep an eye out on your account balance once in a while and make sure you don’t miss any payments on it!

If you’ve read the fine print, you’ll know that banks and building societies could cancel overdrafts at any time. Whilst it’s unlikely to happen and you’d be informed prior, it’s worth being aware of, as it could result in hefty charges.

How to Build a Good Credit Score as a Student or Graduate?

A credit score is one of those important things in life we often ignore until it’s too late. A key indicator of your trustworthiness, a credit score has the potential to seriously impact your future plans. To take advantage of the benefits of good credit post university, start by improving your credit score today. Here are some practical tips to help bring that number up:

  • Join the electoral roll. This is seen as a sign of stability to lenders and often used by credit reference agencies to verify your identity. It’s also an easy way to boost your credit score.
  • Pay your bills on time. Late payments could negatively impact your credit score. Setting up direct debit and standing orders can be a useful way to ensure payments go out on time.
  • Build up your credit history. Lenders want to witness your money management skills in action. Having a credit card, or even a loan that has been paid off in full and on time will signal that you have good management skills.
  • Clear those debts. Pay off any outstanding debt, including credit cards or loans, as soon as you’re able to. Demonstrating a history of paying down outstanding borrowing can boost your credit score.
  • Don’t push it to the limit. Try to keep utilisation of your overdraft or credit card to ≤25% of your limit or lower. This can help boost your credit score and be seen favourably by lenders.
  • Use soft searches for new credit. Instead of a hard credit search, it’s worth looking for loan providers or marketplaces that do a soft search so you can be pre-approved for offers.
  • Don’t keep applying for credit. If rejected, resist the urge to re-apply. Multiple applications could taint your credit file and affect your credit score.
  • Download a credit score builder app. The Pave App is the credit builder that helps build credit with all major UK agencies by reporting on-time payments and tracking your credit score. Give it a try.

What are the Benefits of a Good Credit Score After University?

Whilst a degree certificate could help you pursue a dream career; a good credit score could help you get your ideal flat, buy your first home, dream car and take out those all-important loans. A credit score can impact your ability to get a mobile phone contract. It could even help you land that great job as an increasing number of companies perform credit checks on candidates. Other benefits of having a good credit score can include:

  • Lower interest rates and significant savings. Borrowers with strong credit scores generally secure the lowest interest rates for loans or mortgages. Over a lifetime this can translate into thousands of pounds in savings.
  • Access to better terms, the best loans and more credit cards. Lenders are attracted to borrowers with high credit scores. As a result you could have access to better terms, and be presented with the most rewarding loan and credit card options available. What’s more, you could shop around and compare rates.
  • Greater chances of credit approval. A good credit score increases your borrowing capacity.
  • Higher limits on borrowing. The higher the credit score, the more money you could be eligible to borrow. 
  • Insurance discounts. Borrowers with strong credit scores are typically offered lower premiums.
  • More housing options. The chance of securing your dream home increases with your credit score. A good credit score determines financial trustworthiness. 
  • Bragging rights. Goes without saying!

How to Start Now? 

Building credit isn’t a piece of cake. Fortunately, Pave exists. Pave is an award-winning credit builder app that actively works with you to help you build your credit score. No hard credit check required. In addition, Pave will help you keep on track of your finances by giving you personalised credit fixes, bill reminders and much more. For the price of a pint of Guinness a month, you can build your credit score and better manage your finances today. Find out more here.

Consider reading the 9 Brilliant Tips for Building Credit and Becoming Financially Fit & 8 Tips to Get Your Credit Fixed in 2022 next.