Is it clever to save for university on credit?

Melanie Bien looks at a new card that claims it can help parents help their children
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The Independent Online

With legislation on university tuition fees only needing to pass through the House of Lords before it becomes law, not much stands between parents and mounting demands on their wallets. In response, iPledge is launching a new cashback credit card and linked savings account that enables you to save while you spend.

IPledge - created by the Relationship Marketing International consultancy, Accucard, part of the Lloyds TSB group, and The Children's Mutual friendly society - aims to provide products to help parents save for their children's university education. And a degree certainly doesn't come cheap: according to website, it costs around £7,000 a year to send a son or daughter to university.

"We are working with some of the UK's top brands to help parents save for their kids' futures without changing their spending habits," says Chris Davies, iPledge's chairman. "The new credit card and deposit account will help parents on the way to saving in advance for their children's university costs, rather than waiting with their heads in the sand until bills start to drop on their doormats."

For every £100 spent on the credit card, you receive 80p in your associated deposit account, which currently earns 4 per cent gross interest. This means that if you spend £1,000 a month on your credit card over a year, you will receive nearly £100. This cashback is paid into your account annually.

From May, iPledge cardholders will be able to top this up when they shop online using certain retailers, including Argos and Boots. These savings - on average, 3 per cent of the amount you spend with the retailers - will be paid into the deposit account every six months.

Any effort to increase savings is welcome, but it will be hard to build up much cash using iPledge. According to the company's calculations, if both parents have a credit card, they could save £3,323 between them over 21 years, based on the earnings and spending of the average parent whose children go to university. Clearly, this won't be enough to make much difference.

And with an annual percentage rate (APR) of 15.9, the iPledge card is expensive should you get into debt. If you don't clear your balance every month, you should pick another card charging a lower rate of interest or your savings will be swallowed up by hefty charges.

"Be careful about taking out a credit card with such a high rate of interest, even if there is the benefit of cashback on the side," warns Anna Bowes, savings and investments manager at independent financial adviser (IFA) Chase de Vere.

"If you are a responsible credit card holder, this is a good gimmick because you are getting money for nothing. But the moment you don't pay off what you owe, interest charges will eat into your savings."

Halifax One Visa pays a slightly lower 0.5 per cent cash- back, for example, but it has a much lower APR of 9.9. You could take out one of these cards and invest the cashback yourself: Halifax also offers a good rate of interest, 6 per cent gross, on its Regular Saver account.

Or you could opt for a mini cash individual savings account (ISA). You can invest £3,000 a year until 2006, after which you can put in just £1,000 a year. Ms Bowes recommends Abbey's mini cash ISA, which pays 4.6 per cent interest tax-free.

"Forget about increasing your debt in order to save, and just save sensibly," she advises. "This credit card and linked savings account is not going to raise enough money to pay for university."

Patrick Connolly, research and investment manager at IFA John Scott & Partners, agrees: "You should treat saving for university as you would any other type of saving. Consider how long you've got, how much it is going to cost, how much you can afford and the risk you are happy to take on.

"International diversified funds are your best bet, such as the Witan Investment Trust or one of the Baillie Gifford investment trusts for children."

Darius McDermott, managing director of IFA Chelsea Financial Services, says that equities are your best bet if you are starting to save while your child is young. "Take advantage of the fact that you've got so much time and invest monthly in a unit trust. You can also afford to take on a bit of risk and could build up a portfolio including UK funds as well as an international feel, including the Far East and America."

If you've only got five years or so to go before you need the money, however, you should stick to bonds and cash because you haven't got time to make up any falls in the stock markets.


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