If you are a newly graduated ex-student having just entered the workforce, it can be impossible to afford everything you need and want without borrowing. Unfortunately, given the lack of credit history and earning capacity, credit options for young people are often limited. So what alternatives are available and which one should you pick?
Why do you need the money?
The first thing to consider before applying for any credit is your reason for borrowing. Some common situations calling for extra finance include:
- Needing a new piece of equipment like a laptop or tablet for your studies or work
- Paying for tuition fees
- Investing in appropriate business attire for a job interview or to start full time work – we all know that a couple of suits, a few ties and shirts and some decent shoes can cost a small fortune.
- Relocating to be closer to your work or studies.
- Being hit with an emergency or an unexpected bill like car repairs or major dental work.
- Starting a new business.
Note that the above reasons are all one-off costs in nature, because if you need regular borrowing to fund everyday needs, then you should do some budget planning to reassess your spending habits.
The credit alternatives available to you depend on whether you are looking for short term loans like or longer term finance. For example, somewhere like Wo nga will offer a loan for an average of 17 days, according to their website, borrowing on average £300 (which could cover the cost of a laptop, for instance.) However, if you need long term support for big items like tuition fees or to fund a business start-up, then you should consider loan products tailored for those purposes.
For students looking for help with education costs, student loans not only offer the lowest interest rate, they are also repayable only once you start working.
For those who are looking to start their own business, you should check your eligibility for the start-up loan government scheme for entrepreneurs. If you are eligible, you will be provided with both financial and ongoing mentor support. A personal loan is another option, although it is likely to be quite difficult to obtain such a loan from a high street bank or traditional lenders.
For short term borrowings, young people often turn to credit cards and payday loans.
Credit cards can be great because they come with extra protection for purchases between £100 and £30,000 against theft, damage or if they are substandard. The downside however, is that they can change your spending habits significantly, causing you to spend more than you can afford. Since credit cards offer a continuous line of credit and you will only need to repay minimal amounts each month, it takes a lot of financial discipline not to keep borrowing and end up in huge debt.
With short term loans such as payday loans from wonga.com, you can borrow up to £400 as a new customer or £1,000 as an existing customer. The total amount you will need to repay, including both interest and principal, is calculated at the beginning of the arrangement. Their predictable repayment schedule means you know what to expect each month and you can even make early repayments without penalty charges. Indeed, 9 out of 10 wonga.com customers would recommend their services to their friends.
Which borrowing option should you pick?
The key to finding the right product is to work out how much you need to borrow and how much you can afford to repay without overstretching your finances. If you fail to make repayments, you will be hit with additional charges as well as a dent in your credit rating. You should also keep in mind that whilst products like credit cards might seem convenient, the risk of out-of-control credit card debt is very real.
How to improve credit score
Lenders look at a number of factors when considering your credit application, such as your credit history, the job you have, the salary you earn, and whether you have any assets. As students and new graduates often face higher interest rates and lower borrowing limits due to a lack of credit history, it is important to do everything you can to improve your credit score. Simple things like making sure your name is on the electoral roll, spacing out credit applications and most importantly, keeping up repayments on any outstanding loans can be of huge help in building up a solid credit profile for the future.