Students: avoid these five mistakes that ruin your credit score

Heading to university is about far more than embarking on an undergraduate degree. It is a rite of passage that is likely to encompass your first experience of living under a roof other than your parents' – and sees you taking on responsibility for your own finances.

A toxic mix of shared houses, student loans, and interest-free overdrafts means that by the time students graduate their credit scores can be left in tatters.

New data collected exclusively for Telegraph Money by ClearScore, a credit checking firm, reveals the big mistakes students make with their money that could come back to haunt them when applying for mobile phone contracts, credit cards, loans and mortgages.

Even if you don't get rejected, lower credit scores mean you are likely to miss out on the best rates or deals.

The analysis, covering 117,000 students registered with ClearScore, found the average student has a credit score of just 320, 15pc lower than the national average of 380.

Credit scores are produced by Britain's three "credit rating agencies" – Experian, Equifax and CallCredit. ClearScore uses Equifax, which produces scores between 0 and 700, where 700 is the best.

Below we outline five common mistakes students are at risk of making, and what they can do about it.

Note that the stats refer to ClearScore customers who also happen to be students. As this group are likely to represent the students more engaged with their finances, it is likely a greater number of students are experiencing these issues that the number suggest.

1. Defaulting on payments and County Court Judgments

Over a quarter of the students  surveyed admitted defaulting on payments, such as mobile contracts, hire purchase agreements or credit cards. The more recent the default, the more damaging it is to your credit score.

Setting up a direct debit is the best way to ensure this never happens. For a credit card or loan, preferably this would be set up to pay off the full amount each month. Just meeting the minimum payment will mean you end up paying far more back than you originally borrowed. 

In some cases a defaulted payment may result in a lender issuing a County Court Judgment, sometimes known as a County Court Summons, if you consistently fail to repay.

Around 6pc of students have a CCJ, according to ClearScore. These stay on the Register of Judgments, Order and Fines for six years and will damage your credit score.

2. Making too many "hard" searches

The average student has 1.3 "hard" searches on their credit report. This mark, created by previous applications for credit, is visible to prospective lenders.

Whether or not your application was successful, it will be recorded here and a lender may reject you on the basis you have made too many other applications, or been turned down, over a short period.

Most hard searches stay visible for 12 months but debt collection can remain for up to two years. Applications for loans, credit cards, mortgages and opening utility accounts – including mobile phone contracts – are likely to produce a hard search. 

However, some lenders will do a "soft" search on your credit report – which leaves no permanent mark and are only visible to you.

3. Having outstanding loans 

Today most students have tens of thousands of pounds' worth of student loan debt. Unless these are pre-1998 loans and you defaulted, they are not included on your credit report.

However, other personal loans, including "payday" loans, will be and how you manage these debts affects your credit score. 

Nearly a quarter of the 117,000 students surveyed had a personal loan. The total average "short-term" debt – such as a credit card – of those students was £926.33. As with credit cards, large amounts of borrowing and a poor record of meeting payments will have a negative impact.

4. Living off your credit card 

Banks and building societies love to hand students credit cards. Not only are young people caught up in the excitement of freshers' week more likely to spend beyond their means, most people don't regularly switch providers. A customer gained at the age of 18, may well still be a customer at 75.

Just under 50,000 students – 42pc of the sample size – had an active credit card.  Those who did use a card spent an average outstanding debt of 44pc of their credit limit. ClearScore said this suggested they were using cards to fund their lifestyle, rather than for one-off payments.

But note that lenders take different stances on credit card use. Some prefer regular spending, as long as balances are paid off in full, while others actually prefer you to make minimum payments simply because this is more profitable for them.

5. The utility bill trap

Deciding who pays the council tax, energy and internet bills is one the least enjoyable aspects of living in a shared house.

Sometimes one (highly organised) flatmate will helpfully put all the bills in their own name and recoup the others' share. Other houses decide to share the burden with each housemate taking responsibility for a bill.

Either way, it is easy to lose track of who owes what to who.

Nearly half (48pc) of students said they were named on utility accounts with housemates and one in five (19pc) admitted missing payments on joint bills.

Being named on a utility bill with someone else should not mean you are treated as being "financial linked", unless the provider has good reason to think you are a couple.

However, having a shared bank account where money for bills is paid into will mean you are "co-scored" by agencies. If your housemates are unreliable and regularly behind with repayments consider keeping your finances completely separate.

Justin Basini, chief executive of ClearScore, said: "Actions that may seem harmless at the time, such as missing or ignoring a minor payment on a shared account, can come back to haunt graduates years after leaving university.

"These mistakes could easily affect their credit scores which in turn can impact everything from taking out a mobile phone contract to renting or buying a property later down the line.

"A better credit score ultimately leads to better deals on credit products and getting a grip on this sooner rather than later will help students and graduates get set up for a more stable financial future."

What's the difference between a credit file and credit score, and how do I check them?

A credit report is a record, updated roughly once a month, of your credit history compiled by each of Experian, Equifax and Call Credit. These agencies use the reports to produce their own credit score that indicates how likely you are to be accepted by a lender.

You have a legal right to check your credit file for £2, though you can use free trials offered by the agencies to check.

Ensure addresses are accurate and cancel unused credit and store cards you may have forgotten about. Checking your credit report does not have an impact on your credit score and lenders will not be able to see that you've been checking.