5 Essential Things All UK Students Should Know About Debt

Debt can seem like a distant worry, especially when you’re caught up in exams, deadlines, and making the most of your time at university. However, understanding debt early can save you a lot of stress later on. In support of Debt Awareness Week, we’ve highlighted five crucial things every student in the UK should know about debt and how to manage it responsibly.

1. Not All Debt is Equal

When most people think about debt, they imagine credit cards, mortgages or student loans. However, not all debt is equally harmful. For instance, credit card debt, with its high-interest rates, can quickly spiral out of control if not managed properly. On the other hand, some people consider a small loan to kick start a side hustle as "good" debt as it can be seen as an investment in your future and tend to offer lower interest rates.

In simple terms:

• Good debt is generally considered any debt that may help you increase your net worth or generate future income. Importantly, it typically has a low interest or annual percentage rate (APR) and manageable repayment plans.
• Bad debt is expensive debt that doesn’t contribute to long-term benefits, like credit card debt or debt from unnecessary purchases that won't increase your net worth or future income. Bad debt often has a high interest rate now or a variable rate that could become high in the future, meaning you'll likely end up paying a premium for purchases that are worth less over time.

Understanding the difference between “good” and “bad” debt is essential for making better financial decisions, helping you maintain long-term financial health.

PRO TIP: Always consider whether taking on a debt is a good investment in your future. Check the interest rates, when any interest-free terms might end, and your ability to repay any debt—whether it’s a student loan, credit card balance, or BNPL service—before committing to it.

2. How Interest Can Add Up Quickly and Impact Your Financial Future

Whether it’s a student loan, credit card balance, or Buy Now, Pay Later (BNPL) service, interest can add up fast. This means that while a debt might seem manageable now, it could become a heavy burden if you don’t monitor how interest compounds over time. Interest rates are key in determining the total cost of your debt, so it's vital to understand them.

BNPL schemes are increasingly popular, especially among students, as they allow you to split purchases into smaller, interest-free payments. But if you miss a payment or have multiple BNPL plans, the debt can quickly snowball. Many BNPL services charge high interest if you don’t pay on time or fail to clear the full balance.

PRO TIP: If you have credit cards or BNPL plans, try to pay them off early, even in small amounts. This will help reduce interest charges in the long term.

3. Understanding the Terms of Your Student Loans and BNPL: A Key to Debt Management

If you’re relying on student loans to fund your studies, understanding the terms of your loan is crucial. This includes the interest rate, repayment plans, and loan forgiveness options available to you. The UK student loan system has undergone several changes, so it’s important to be clear about what applies to your situation.

One common question is whether it’s worth paying off your student loan early. Generally, it’s not recommended. Student loan interest rates are typically lower than other types of debt, so it’s often more beneficial to focus on other financial goals, like saving for a deposit on a house or investing for the future.

Pro Tip: Understand your student loan plan and repayment options thoroughly. Visit our recent blog to learn more about student loans in the UK.

4. Build A Good Credit History To Open Up Future Opportunities

To establish a credit history, it’s important to take on some form of debt. Responsible use of credit—such as opening a credit card or taking out a small loan —allows lenders to see how well you manage borrowed money. It might sound a bit counterintuitive, but without any debt, there’s no record of your borrowing behaviour, which makes it difficult for lenders to assess your creditworthiness.

However building a good credit history is an important part of managing your finances. A good credit score will improve your chances of borrowing money at a favourable rate for a car loan, a mortgage or event getting a job. Missed payments, high credit utilisation, or taking on more debt than you can handle can lower your credit score. Responsible debt management—such as paying your bills on time and keeping your debt-to-income ratio low—will help maintain a good credit score. A strong credit score opens doors for better financial opportunities, including lower interest rates.

Pro Tip: Regularly check your credit report through services like Experian, ClearScore, or Equifax to ensure your score is on track and to identify any potential issues.

5. You Can Start Building Good Debt Habits Now to Secure Your Financial Future

It may feel like you have plenty of time to worry about debt later, but the earlier you start building good habits, the better. Begin by setting a budget that accounts for your income (whether it’s from part-time work, internships, or a student loan), your expenses (tuition, rent, textbooks, daily living costs), and your savings goals. Cutting back on unnecessary spending—like buying takeaways or impulse shopping—and exploring ways to increase your income through side hustles can make a significant difference.

Starting financial habits early—like saving a percentage of your income, tracking your budget, and avoiding unnecessary debt—can protect you from future financial pitfalls.

Pro Tip: Use budgeting apps or calculators like MoneyHelper or Monzo to plan your budget and track your spending. Small changes in your financial habits now can set you up for a better future.

Final Thoughts: Managing Debt for Long-Term Financial Success

Debt may seem overwhelming, but by understanding it and taking steps to manage it wisely, you’ll set yourself up for financial success. Whether it’s understanding your student loan terms, tracking your spending, or building your credit score, being proactive now will make it easier to avoid financial stress down the line.

During Debt Awareness Week, take a moment to reflect on your financial situation. Consider what changes you can make today to ensure that debt doesn’t become a burden later.

Remember: Financial literacy is key. The more you know, the better equipped you’ll be to manage your debt and build wealth in the long run. For more tips on managing your finances, check out MyPocketSkill.com and start building your financial literacy today.