What's the most pain-free way of paying off my student loan and credit card?

money makeover; Name: Claire Graham Age: 22 Job: Group underwriting administrator at Canada Life Salary: pounds 12,500 (about pounds 17,000 including overtime)
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Claire is really worried about her debts. She graduated from Exeter University last year with debts of pounds 3,500 in various accounts. On top of this, Christmas shopping sent her credit card bills rocketing, and a pounds 2,000 computer bought this spring on a buy-now-pay-later basis has made things even worse.

Since then she's really tightened her belt. But the debts won't go away. And next spring she will have to start paying off her student loan at pounds 55 per month over five years. "I really need some guidance about how much I should be paying off ... It's all a bit haphazard at the moment," Claire says.

Luckily she lives rent-free with her parents in Hatfield. And she's been able to spend a bit more recently because she now gets a regular amount of overtime at work.

Andrew Swallow of Ipswich-based Andrew Swallow Professional Financial Planning (01473 252156) says: "Most people get into debt at university, but adding to it - as Claire has done - will lead to disaster unless she acts now.

"Next year Claire will have loan repayments of about pounds 550 per month. Since her car costs pounds 80 per month to run, she'll only have pounds 370 a month to live on. So if she's spending all her money now, how much more will she need to borrow next year?

"It's hard to do, but the best way out is to go `cap in hand' to her parents. As long as she approaches her parents with a sensible plan, and pays them a reasonable rate of interest which doesn't leave them out of pocket, Claire will save thousands of pounds.

"If she can't, or won't, borrow from her parents then she should consolidate some of her loans into a single bank loan over three to five years. If her bank is not prepared to lend her the cash then she might have to persuade her parents to guarantee the loan.

"If all fails, I think Claire should sell her car and use this money to repay her debt.

"Let's look at each loan in turn. Claire should either maintain the Lloyds Bank Graduate Loan or persuade her parents to take it over. The interest rate on this is less than the norm for general bank loans but more than Claire needs to pay her parents. The student loan is good value at about 3.82 per cent a year.

"As for the computer loan - it is daylight robbery! Claire should repay the money before the loan comes into effect, because when it does, she'll be paying interest on it at 44.77 per cent a year.

"And although the rate of interest on her MBNA credit card is quite competitive at 17.9 per cent APR, it is still exorbitant. Pay this off immediately.

"A typical loan agreement with parents would give them the same level of interest as a good building society account, say 7 per cent. The term of the loan could be set at 24 months. Repay the loan by standing order - don't rely on cheques or you'll forget!

"If Claire transferred all her borrowings, except the student loan, to a loan from her parents on those terms, her monthly repayments would be pounds 261. With the student loan, this would make the total cost of her borrowing over time pounds 9,572.

"A consolidation loan from the bank would cost around 13 per cent a year right now. This could be used to repay the computer and the credit card. This route would mean a total borrowing cost of pounds 9,998.

"Claire should talk to her parents first. If they agree, write to each loan company and ask for a redemption statement. Some lenders charge all the interest at the start. So if the loan hasn't been going long, you still owe the full balance.

"Then decide which loan is best to repay and which is best to continue. She should then consolidate her loans into a single loan to her parents or to the bank.

"Finally, cut up the credit card, and don't borrow any more money! Continuing the hair-shirt approach, I suggest Claire remains at home until her biggest loans have been repaid. She can't afford to pay rent as well as her debts. When she's more solvent she can spread her wings without the risk of financial ruin."

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