The Debt All Students Should Avoid

If you're off to University this autumn, make sure you know to watch out for this dangerous form of debt!

If you're going away to University in a couple of weeks, you're probably feeling more than a little overwhelmed.

The prospect of being miles away from family, friends and familiar surroundings might seem frightening. But when I departed to begin my English degree in 2000, it was the thought of managing all my own finances that sent the biggest chill down my spine.

Being responsible for paying bills, keeping up with rent and sorting out your own shopping are all tough tasks when you're a beginner.

However, the D-word -- debt -- is the real bogeyman when it comes to student budgeting.

Not all student borrowing is bad

I won't beat about the bush here: most young people who go to University will have to borrow money to do so.

But borrowing from the Student Loans Company (SLC) means investing in your future, and your official student loan is not something you should worry about as you embark upon your course.

Nevertheless, a healthy fear of other debt is. Well. Healthy.

Just because your SLC debt isn't dangerous, that doesn't mean all forms of credit are cushy.

In fact, knowing the best -- and worst -- ways to borrow now could save you a lot of heartache later.

Dangerous debt

Even in the short time since I first graduated, it seems to have become increasingly easy for students to get hold of credit cards.

In fact, many banks now offer them as part of their student account packages, in addition to overdrafts.

But is using credit cards a clever way to spend while you're studying?

Here, I've rounded up details of the student credit cards available from Britain's high street banks.

As you can see from the table, the credit limits available on all these cards are quite low.

However, the interest (APR) they charge on borrowing is not.

While the Barclaycard Student Credit Card offers a comparatively low APR of 14.9%, all the other credit cards listed charge an above-average rate.

Therefore, while you won't be able to run up thousands of pounds' worth of debt on these pieces of plastic, they could still end up costing you dear.

Your flexible friend?

One reason why some students may be drawn to credit cards is that they offer your budget a degree of `flexibility'.

In theory, there is nothing wrong with spending on your credit card and then paying off the balance in full before you're charged any interest.

In fact, if you're able to do this, a credit card could help pull you out of short-term money mires -- without costing you a penny.

Unfortunately, in my experience, most students live on such tight budgets that this won't prove possible.

The crazy cost of credit card debt

In reality, filching money from next month's kitty to pay for last month's train ticket/groceries/text books can start a dangerous cycle that's difficult to break.

Even worse, it's all too easy to simply repay the minimum monthly amount demanded by your credit card provider, rather than pay off your balance in full.

This will mean you start racking up expensive interest on the amount you've borrowed, and your tiny repayments will never really make a dent in your debt.

For example: if you spent £500 on the Lloyds TSB Student MasterCard during the first month of your degree and only ever paid the minimum monthly repayment (2%), it would take you nine years to clear your debt.

Yes -- nine years!

What's more, you'd be charged a whopping £574 in interest during that period -- more than you originally borrowed.

More money monsters

If that wasn't enough to terrify you, perhaps this will be: store cards are even more expensive to borrow on than credit cards.

No doubt you'll have retailers begging you to sign up for these during your time at University. You're probably too young to remember the song, but as the kids from Grange Hill would put it: just say no!

Also, be aware that withdrawing money from the hole in the wall using a credit card is likely to cost far more than spending on it in the shops -- so this is another potential pitfall to avoid.

Usually, credit card providers charge a higher interest rate on `cash advances' -- and they'll use a sneaky trick called negative payment hierarchy to ensure that expensive debt is trapped on your card for as long as possible.

Be savvy, not scared

As a student, managing your money in a way that's smart and savvy will help you sleep at night (without letting those dangerous debt bugs bite!)

Knowledge is power, so make sure you understand as much as possible about the financial products you use throughout your degree -- and beyond.

Going to university is a powerful turning point in anyone's life. When it comes to spending and saving, the habits you form now could stick with you for years to come.

Therefore, it's a great idea to make sure they're the right ones. Good luck!

More in our Student Special series: Managing Your Finances At University | Students: Reduce Your Bills! | My Five Top Student Bank Accounts |  Keep Your Stuff Safe At University | Money Saving Tips For Students | Money Talk Podcast: Everything Students Need To Know About Money