Tertiary students struggle to pay off interest-free overdrafts before study is finished

Many students are leaving tertiary studies without paying off their overdraft. Photo / 123rf

Nearly half of tertiary students who take out an interest-free overdraft haven't paid it off before they finish their study and many end up paying interest, research has revealed.

Credit agency Credit Simple found 31 per cent of students use an interest-free overdraft while undertaking tertiary education.

But 49 per cent did not pay it off before finishing study.

Of those with an overdraft 11 per cent paid it off in the first six to 12 months after finishing study and paid some interest.

But 9 per cent took more than two years to pay it off.

Hazel Phillips, a spokeswoman for Credit Simple, said banks offered some great deals to students but students needed to use it to their advantage by paying it off before interest was charged.

"It's important students are using interest-free deals correctly and that they put payment plans in place to ensure the debt is paid before they leave university.

Phillips said interest-free deals could be a good way for people to start building up their credit rating.

"If regular payments are made before interest starts incurring, it will be positively reflected on a student's credit score and provide a foundation for the future," she said.

But she warned those who missed a payment risked damaging their credit score.

"When interest starts being added to loans, it makes it harder to keep up with minimum payments and a missed or late payment can damage your credit score."

A poor credit score can make it harder or more expensive to borrow money in the future.

Phillips urged students to make a payment plan to ensure the debt was paid off in full before taking on an overdraft, review the loan every month to ensure you are on track to clear the debt and make additional payments to pay it off.