Wealth Check: Getting rid of costly card debt the first step to building a deposit

Jennie is keen to start saving for her first home, but our experts say she will struggle until she sorts out and prioritises her various debts

The patient

Jennie Davies, from Bootle in Liverpool, is keen to clear the debts she's built up so she can start saving for a house deposit. The 28-year-old works as a test analyst and earns about £27,000 a year. She has been in this job for three years.

Jennie lives at home with her grandparents, but she hopes to take the first step on to the property ladder in the not-too-distant future.

"I'm hoping to buy a three-bed home in Liverpool for around £125,000-£150,000," she says. "But I know I'll have to save hard to make this happen as I've only got around £1,500 in my current account with NatWest, so I'm essentially starting from scratch."

The biggest obstacle at the moment is her debts. "I owe £3,500 on two credit cards: one with Barclaycard and one with Capital One," she says. "I also owe £10,000 on a loan with NatWest, and £15,000 on a student loan. In addition, I've run up an overdraft of £1,500 on my current account. These are debts which I mostly amassed while travelling – and I really want to get these paid off quickly so I can concentrate on building up my savings."

Jennie is in the fortunate position of not having to pay rent or a mortgage as she lives with her family; she contributes £250 a month towards the household bills.

As yet, Jennie has not begun paying into a pension. She also has no protection policies in place.

The cure

Our panel of independent financial advisers agree that getting on to the property ladder can be extremely difficult for young people in Jennie's position, with house prices having risen and lenders more reluctant to lend.

They urge Jennie to focus on paying off her debts so she can start saving seriously for a deposit. They add that while it may not feel like a priority at the moment, the sooner she starts paying into a pension, the better.

Focus on reducing debt

Adrian Lowcock at Hargreaves Lansdown says Jennie needs to settle the debts on her cards, bank loan and overdraft as a priority.

"The higher the interest rate, the greater the urgency with which Jennie needs to pay off that debt," he says. "Credit cards are usually the most expensive, but they require the smallest monthly payments. Loan rates are likely to be lower, but the minimum repayment will be higher."

Consider consolidating debts

Mr Lowcock suggests Jennie may want to look at consolidating the credit card debt into the bank loan.

"This would save her money in interest payments," he says.

"She could also ask her bank about making overpayments on the loan. Equally, if the rate on the overdraft is also high, it may be worth consolidating the overdraft into the bank loan as well. The reduction in interest payments will free up some cash which she can use to repay her debts more quickly."

As an alternative, Patrick Connolly at AWD Chase de Vere suggests that Jennie could get better terms by moving her credit card and loan debts elsewhere. Useful sites for comparing rates include MoneyFacts.co.uk and MoneySupermarket.com.

"She should then look to pay off her overdraft," Mr Connolly says. "However, paying off the student loan is far less urgent as Jennie will be paying a lower rate of interest on this loan. She can leave this on the back-burner for now and let this clear naturally through her payroll as her income increases."

Build up savings

Mr Lowcock says that while it's admirable that Jennie has saved £1,500, she would actually be in a better position financially if she used this money to pay her debts off first.

"She may be earning little over 0 per cent on money in her current account, yet paying a hefty rate of interest on her credit cards," he says. "In this situation, there's no point have both savings and debt."

Once Jennie's got her debt under control, her next priority must be building up some cash savings.

"She'll need cash for two reasons," says Mr Connolly. "Firstly as an emergency fund so she has money available for any short-term requirements; this will help her avoid having to go any further into debt. Secondly, she will need savings to build a deposit."

When Jennie is in a position to save, Mr Connolly urges her to build cash savings in an individual savings account (Isa).

"This would separate her savings from her day-to-day current account money, and all interest would be earned tax-free," he says.

"Jennie could also look to set up a regular direct debit from her current account into a cash Isa to help her get into the savings habit. In addition, she should look to boost her income by making use of a cashback site such as Quidco, as this will give her money back each time she makes purchases online."

Plan for a deposit and other house-buying expenses

Dave Penny from Invest Southwest suggests that when it comes to taking the first step on to the property ladder, the Government's recently announced Help to Buy mortgage support scheme could be worth considering.

"This would enable Jennie to buy with a deposit of just 5 per cent – meaning any deposit in excess of £7,500 should give her the opportunity of buying a house in her desired price bracket," he says. "With the right discipline, she could reach this goal in around three years' time."

Nonetheless, Mr Connolly reminds Jennie that she can't start saving for a deposit until she's sorted out her debts. "And if she ends up needing a deposit of 10 per cent – or more – this could mean further years of saving," he says. "At the same time, Jennie needs to give some forward thought to her day-to-day expenses as having her own place will be considerably more expensive than paying £250 to live with her family."

Don't ignore pension planning

While saving for the future may not be Jennie's most pressing financial objective at present, given that she is now 28, this is something she simply can't ignore.

"The sooner she starts saving, the easier it will be for her to achieve a reasonable standard of living in retirement – or to be able to retire when she wants," says Mr Connolly.

Mr Penny urges Jennie to check whether her employer offer a workplace pension.

"If the firm doesn't do so already, it will have to do so in the very near future under a scheme known as auto-enrolment," he says. "With this scheme, not only will Jennie have to contribute, but her employer and the Government will have to make contributions too. Jennie should take up this offer when it becomes available."

Once she's completed her house purchase, Mr Penny advises her to think about increasing the amount she pays into a pension.

 

Delay investing for the time being

Jennie can afford not to put money into investments for now, according to Mr Connolly.

"Her focus must be on paying off her debt and building cash savings before looking at making longer-term investments," he says. "When she is in a position to invest, it might be sensible to consider tax-efficient stocks-and-shares Isas and to invest in these for the long-term. This will work well alongside her auto-enrolled pension scheme."

 

Take out decent protection policies

Mr Penny says there is no point in Jennie making big plans if it all goes wrong beforehand, and urges her to check what protection benefits are available from her employer.

"She should then consider an income protection policy which pays a tax-free monthly benefit if the policyholder is off work, until retirement, recovery or death," he says. "But as Jennie does not have any financial dependants at present, she does not need life cover at this time."

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
scienceExcitement from alien hunters at 'evidence' of extraterrestrial life
Life and Style
Customers can get their caffeine fix on the move
food + drink
News
newsRyan Crighton goes in search of the capo dei capi
Extras
indybest

PROMOTED VIDEO
Arts and Entertainment
Actors front row from left, Jared Leto, Jennifer Lawrence, Meryl Streep, Ellen DeGeneres, Bradley Cooper, Peter Nyongío Jr., and, second row, from left, Channing Tatum, Julia Roberts, Kevin Spacey, Brad Pitt, Lupita Nyongío and Angelina Jolie as they pose for a
film
Sport
sport
Life and Style
techCould new invention save millions in healthcare bills?
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
Voices
A meteor streaks across the sky during the Perseid Meteor Shower at a wind farm near Bogdanci, south of Skopje, Macedonia, in the early hours of 13 August
voicesHagel and Dempsey were pure Hollywood. They only needed Tom Cruise, says Robert Fisk
News
peopleEnglishman managed quintessential Hollywood restaurant Chasen's
Life and Style
food + drinkHarrods launches gourmet food qualification for staff
Arts and Entertainment
Michael Flatley prepares to bid farewell to the West End stage
danceMichael Flatley hits West End for last time alongside Team GB World champion Alice Upcott
Life and Style
Horst P Horst mid-fashion shoot in New York, 1949
fashionFar-reaching retrospective to celebrate Horst P Horst's six decades of creativity
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Life and Style
news

As Voltaire once said, “Ice cream is exquisite. What a pity it isn’t illegal”

Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Market Administrator (1st line Support, Bloomberg, Broker)

    Negotiable: Harrington Starr: Market Administrator (1st line Support, Trade Fl...

    Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

    £35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

    Data Support Analyst (Linux, Solaris, Windows Server, Reuters)

    Negotiable: Harrington Starr: Data Support Analyst (Linux, Solaris, Windows Se...

    Helpdesk Support Engineer (Windows, MS Office, Exchange)

    Negotiable: Harrington Starr: Helpdesk Support Engineer (Windows, MS Office, E...

    Day In a Page

    All this talk of an ‘apocalyptic’ threat is simply childish

    Robert Fisk: All this talk of an ‘apocalyptic’ threat is simply childish

    Chuck Hagel and Martin Dempsey were pure Hollywood. They only needed Tom Cruise
    Mafia Dons: is the Camorra in control of the Granite City?

    Mafia Dons: is the Camorra in control of the Granite City?

    So claims an EU report which points to the Italian Mob’s alleged grip on everything from public works to property
    Emmys look set to overhaul the Oscars as Hollywood’s prize draw

    Emmys look set to overhaul the Oscars as Hollywood’s prize draw

    Once the poor relation, the awards show now has the top stars and boasts the best drama
    What happens to African migrants once they land in Italy during the summer?

    What happens to migrants once they land in Italy?

    Memphis Barker follows their trail through southern Europe
    French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

    French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

    The ugly causeway is being dismantled, an elegant connection erected in its place. So everyone’s happy, right?
    Frank Mugisha: Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked

    Frank Mugisha: 'Coming out was a gradual process '

    Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked
    Radio 1 to hire 'YouTube-famous' vloggers to broadcast online

    Radio 1’s new top ten

    The ‘vloggers’ signed up to find twentysomething audience
    David Abraham: Big ideas for the small screen

    David Abraham: Big ideas for the small screen

    A blistering attack on US influence on British television has lifted the savvy head of Channel 4 out of the shadows
    Florence Knight's perfect picnic: Make the most of summer's last Bank Holiday weekend

    Florence Knight's perfect picnic

    Polpetto's head chef shares her favourite recipes from Iced Earl Grey tea to baked peaches, mascarpone & brown sugar meringues...
    Horst P Horst: The fashion photography genius who inspired Madonna comes to the V&A

    Horst P Horst comes to the V&A

    The London's museum has delved into its archives to stage a far-reaching retrospective celebrating the photographer's six decades of creativity
    Mark Hix recipes: Try our chef's summery soups for a real seasonal refresher

    Mark Hix's summery soups

    Soup isn’t just about comforting broths and steaming hot bowls...
    Tim Sherwood column: 'It started as a three-horse race but turned into the Grand National'

    Tim Sherwood column

    I would have taken the Crystal Palace job if I’d been offered it soon after my interview... but the whole process dragged on so I had to pull out
    Eden Hazard: Young, gifted... not yet perfect

    Eden Hazard: Young, gifted... not yet perfect

    Eden Hazard admits he is still below the level of Ronaldo and Messi but, after a breakthrough season, is ready to thrill Chelsea’s fans
    Tim Howard: I’m an old dog. I don’t get too excited

    Tim Howard: I’m an old dog. I don’t get too excited

    The Everton and US goalkeeper was such a star at the World Cup that the President phoned to congratulate him... not that he knows what the fuss is all about
    Match of the Day at 50: Show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition

    Tom Peck on Match of the Day at 50

    The show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition