Wealth Check: Debts pose a few problems for a former debt collector

Ellie Nichol is a debt collector turned debtor. "When I was at university I worked part-time for Lloyds TSB," she says. "My job was to ring people to find out why they had fallen behind on repayments. It was tough but it was an interesting education." Ms Nichol, 24, now is an Oxfam trainee, helping organise the charity's Control Arms campaign, which is trying to combat the global proliferation of light weapons.

And she wants advice on managing her own debts. She has £9,100 in student loans, being repaid at £80 a month, and a £1,500 HSBC overdraft. "I've cut up my credit cards and I'm trying to get my overdraft down into the interest-free zone, but is there anything else I ought to be doing?"

She has saved £3,000 in a Cheltenham and Gloucester Isa and £1,000 in a Northern Rock Isa. She wants to transfer her balance from Northern Rock because it is coming to the end of a six-month high-interest period. "Where would I get the best rate of interest?" she asks.

Ms Nichol, who is learning to drive, pays £50 a month into an Oxfam stakeholder pension scheme, administered by Norwich Union. She is keen to start making provision for old age.She shares a rented house in Oxford with four others, and pays £200 a month. "I'd like to get on the property ladder but I've not got much of a deposit."

We put her case to Helmut Dempsey, financial management consultant at Vantis Morgan Nevill in London, Ashley Adam, independent financial adviser at Best Advice Financial Planning in Surrey, Ben Yearsley, investment manager of Hargreaves Lansdown in Bristol, and Jennifer Storrow, managing director of Gee and Company in Shropshire.

ELLIE NICHOL, 24, OXFAM GRADUATE TRAINEE

Status: Single;

Occupation: Oxfam trainee;

Education: BA in international relations at Sussex university;

Debts: £9,100 student loan; £1,500 HSBC overdraft;

Salary: £15,000;

Savings: £3,000 in Cheltenham & Gloucester cash Isa; £1,000 in Northern Rock cash Isa

Pension: £50 a month to Norwich Union stakeholder;

Property: Renting

Outgoings: (Per month) Pension £50; rent £200; driving lessons £40; student loan repayments £80; overdraft repayments £100; entertainment £60; holiday fund £100.

Solution 1: Debt

Ms Storrow says Ms Nichol should continue paying off her student loan since the interest rate is so low. She also says Ms Nichol's HSBC overdraft rate is competitive. She says the real danger comes from credit cards, although Ms Nichol has cut hers up.

Mr Dempsey thinks Ms Nichols should pay off her overdraft with her cash Isa funds. Although her overdraft has an interest-free zone under £1,000, he adds, she should aim to get into the black and use the overdraft as a cushion if she gets into financial problems.

Ms Nichol has a £9,100 student loan. Ms Adam says she should try to increase her repayments and get rid of the debt.

Solution 2: Savings

Mr Yearsley says Ms Nichol should keep her savings in cash Isas rather than equity Isas since she may need the funds soon. Equities are not good for the medium term.

He thinks she should use her £1,000 Northern Rock Isa to pay off her overdraft and continue paying into her Cheltenham & Gloucester Isa. Mr Dempsey says Marks & Spencer is offering an interest rate of 4 per cent on its instant-access Isa and Ms Nichol should consider switching her Northern Rock Isa funds to one of these. Another option would be

Ms Storrow says Northern Rock is offering 4.1 per cent on cash Isas, so Ms Nichol could ask them to transfer her investment, and insist on an instant access option.

Solution 3: Pension

Ms Storrow says Ms Nichol should ring her pension manager, Norwich Union, quoting her policy number, and ask to see the figures of her fund's past performance. This will give her an indication of how well the fund is doing and whether she ought to take action, or switch to another pension manager.

Mr Adam says Ms Nichol should leave her pension alone for now and not increase her contributions.

Solution 4: House buying

Ms Storrow recommends Ms Nichol wait until her late twenties to buy a property. She says if Ms Nichol bought and had to move away to another job, it would be tricky to rent out her house. Mr Adam says Ms Nichol's income will prove a problem if she tries to buy a home and building a suitable deposit will take a long time, given her present income.

Mr Dempsey says Ms Nichol's £15,000 salary would probably buy her a mortgage of only £45,000. But if she were to buy with her four housemates, they could get a mortgage of £180,000 to £200,000, assuming they have similar incomes.

Over 25 years, and assuming 5 per cent interest, this would cost them £292 a month each. This compares well with Ms Nichol's present rent of £200.

Whatever mortgage Ms Nichol opts for, she should go for fixed-rate, because the bank base rate is likely to rise again soon.