Wealth Check: 'I can't make a dent in my card debt'
Sunday 23 July 2006
The problem: How can a graduate get rid of a £17,000 burden?
Since graduating and moving to London five months ago, Emily Taylor, 22, has been adjusting to the high cost of living - while also trying to pay off her debts.
She currently owes £3,850 on a Virgin credit card, £3,000 on a Mint card and £150 on a Capital One card - all at 15.9 per cent. On top of this, she has to repay £10,000 in student loans
Emily regularly switches cards to take advantage of interest-free periods but would like to get rid of these debts altogether. At the moment, she only makes the minimum monthly repayments.
"I wonder whether I should consolidate all my card debts [into one loan] and pay off more each month." she says.
The problem is that she can't obtain a high enough credit limit on any one card to be able to switch all her debts on to it. "It means I end up taking out more cards and have to pay balance-transfer fees."
Emily earns £18,000 as a public relations consultant but, with no savings to fall back on, she finds it tricky to make ends meet in London. To this end, she makes full use of the £1,750 overdraft on her HSBC graduate account every month. This is interest-free up to £750 and 14.8 per cent above that.
She also has another outstanding overdraft of £500 - interest-free - on a NatWest graduate account.
Emily pays £400 a month to rent a room in a two-bed flat in north London. While she has considered buying her own property, she's aware this is not possible at the moment.
In the short term, she wants to save money to go travelling next year. "I think work might be too hectic for me to be able to go abroad for long, but three weeks in South America would be great," she says.
Emily is not contributing to a pension scheme and has no protection policies in place.
The cure: Cut your spending and step up the repayments
Getting rid of her debt will be tough but it is manageable, our panel of independent financial advisers (IFAs) agree.
Adrian Kidd from IFA Mint Financial Planners recommends she look at her last three months of bank statements to see where money can be saved. "After servicing her debts [each month], she needs to address her over-spending. With time and discipline, she can cut this right down."
Once she has done this, she can increase her monthly repayments and consider consolidating the credit card debt into a low-interest personal loan.
Given her salary and outgoings, says Mike Pendergast of IFA Zen Financial Services, Emily should be able to pay off an extra £50 to £100 each month.
"[She should] focus on the borrowings that carry the highest interest rate, starting with the Virgin card [which has the biggest outstanding balance]," says Mike Marigold from IFA Montgomery Charles Financial Management. Emily could then take out a personal loan to consolidate her most expensive debts. Direct Line, for example, offers a much lower interest rate of 5.6 per cent.
Emily must move beyond just paying off the interest each month, Mr Marigold stresses. "It's all very well switching from one deal to another, but if you're not actually repaying and reducing that debt then it will still hang over you."
As the interest rate on student loans is low and linked to inflation - currently just 3.2 per cent - Emily can continue repaying this gradually.
Once she has dealt with her debt, Emily should make use of a high- interest, tax-free cash individual savings account (ISA) to build an "emergency" fund equal to three months' pay.
Bradford & Bingley's instant access eSavings ISA, for example, currently pays 5 per cent on balances of £1 or more.
For her planned overseas trip, Mr Kidd recommends that Emily open a separate account and make regular savings into it. "She should not succumb to the temptation to pay for the holiday on her credit card."
When Emily is eventually in a position to buy a property, she could consider a shared-ownership scheme such as one run by a housing association, says Mr Marigold. "She would own 25 per cent of her new home, say, and then pay rent on the balance. This is a good way of getting a foot on the ladder."
Mr Marigold recommends that Emily find out if her employer will make contributions to a pension plan on her behalf.
As Emily has no dependants, there is no need for life cover. But she should check if benefits such as income protection are available through her work.
Interview by Harriet Meyer
If you would like a makeover, write to Sam Dunn at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email email@example.com
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