Wealth Check: Debt weighs heavy as she stands on her own two feet

A divorcee who is working all hours to make ends meet asks how she can break free of her card bills. By Harriet Meyer
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The Independent Online


THE PATIENT

After going through a divorce last year, Karen Gordon, 34, is focusing on securing her financial future. "I was the breadwinner in the relationship. Now I want to get to a stage where I'm debt-free and can afford to give up working all hours."

She works seven days a week and has done so for the past six years, earning a total of around £39,000 a year. This consists of a full-time salary from her job in sales and accounts with a lighting manufacturer, as well as working at weekends for Homebase.

That she works so hard is partly down to substantial debts, which she is keen to wipe out as quickly as possible. "Since my divorce I have cleared a £3,500 overdraft," explains Karen, from Darenth in Kent. "But I still have debt on my plastic to deal with."

She has £17,000 split across a range of credit cards. This includes £6,400 on a Capital One MasterCard with interest charged at 6.03 per cent, £4,000 on a Barclaycard at 5.9 per cent, £3,700 on Tesco's plastic at 16.9 per cent, and £1,000 on Marks & Spencer's MasterCard at 18.9 per cent. She also has smaller sums on a variety of other cards.

"I pay off more than the minimum each month on most of these. And I try to live by Switch rather than credit cards now."

Karen bought her three-bedroom house for £130,000 in 2001. The property is now worth around £210,000. She pays £592 a month for her 20-year £126,000 mortgage with Abbey, fixed at 4.94 per cent for the next three years. Of this sum, £90,000 is paid on an interest-only basis, with the remainder on repayment.

As a vehicle for the interest-only element, Karen puts £100 a month into a Friends Provident with-profits endowment plan, currently worth £13,000 and set to mature in 2021.

For short-term savings, she has £1,000 in a cash individual savings account (ISA) with Marks & Spencer's paying 5.25 per cent interest, and £800 in a Capital One account at 5.05 per cent.

For her retirement funds, she has paid into various workplace pension schemes over the years, including a final salary plan with Sainsbury's for 10 years, which is now frozen.

At present, she pays £20 a month into a stakeholder pension with Homebase, worth £3,200, and £69 a month into a stakeholder with Lightgraphix, worth £4,500. She has held both these plans for five years.

For protection, she has life insurance with her endowment policy in addition to paying £7 a month for £90,000 of life cover with Legal & General.



THE CURE

Karen is to be praised for working hard to reduce her debts, agree our panel of independent financial advisers (IFAs).

"Her obvious discipline will help meet her goals," says Anna Sofat from IFA Addidi Wealth. "But she needs a targeted approach to debt management rather than simply paying more than the minimum on her cards each month."



Debt

When tackling borrowings, the wisest strategy is to focus on those with the highest interest rate, ad-vises Mark Wapshott from IFA St Edmundsbury Financial Services.

Most of Karen's card debts are on low rates of interest. However, those on standard rates, such as Marks & Spencer and Tesco's plastic, are high and should be dealt with first.

Alternatively, she could consider transferring the debt on to cards offering interest-free balance transfers. "There are great deals available from the likes of Virgin Money, for example, which last 15 months," says Ms Sofat.

But Karen should factor in a balance-transfer fee. This could amount to as much as 3 per cent of the sum being moved.



Savings/investments

Karen has just £1,800 in savings, which is far from the three months' salary recommended by advisers as a cash buffer against emergencies. But she should not be looking to step up her saving while she still has debt remaining.

That said, she should ensure she is getting the best rates possible on the cash already put aside, and she can compare deals at Moneyfacts.co.uk. There are cash ISAs paying around 6 per cent, suggests Mike Pendergast from IFA Zen Financial Services.

Karen may wish to move the £800 in the Capital One account into a tax-free ISA to use up her maximum annual £3,600 allowance.

The endowment plan should be reviewed by a financial adviser; she may be better off stopping contributions and switching the interest-only part of her mortgage to repayment. "There is an investment risk with endowments that would not be the case with a repayment loan," says Ms Sofat.



Retirement

If her employers match her payments or put anything at all into her pension plans then Karen is sensible to contribute, says Mr Wapshott. However, the fund mix should be checked to see how they are performing, and as she has several decades to go before retirement, she can afford to take some risks in fund choice.

She should also get an up-to-date statement on her Sainsbury's final salary plan, says Mr Pendergast.

Another key to a decent pension pot is upping payments by at least the rate of inflation. "Increasing contributions by 5 to 10 per cent each year over the next 10 to 15 years would be wise," says Ms Sofat.



Protection

The advisers question her need for life insurance as she has no dependants and this cover pays out only on the death of the policyholder.

Income protection – which pays out a regular sum should she be unable to work due to illness or accident – would be more use, given her situation. "A plan that would pay out around £2,400 a month after six months until age 55 would cost her about £30 a month," explains Ms Sofat.

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