Wealth Check: 'Help! My salary is being swallowed by my debts'

A university worker feels trapped by a personal loan plus credit and store card debts, as well as her interest-only mortgage

THE PATIENT

Pam Mullin, from Tyldesley in Manchester, is desperate to clear the hefty debts she owes on a number of credit cards, store cards and a personal loan, as her monthly repayments amount to more than £450.

The 38-year-old divorcee also feels trapped by her mortgage.

Pam has worked at the University of Salford for the past 16 years, and in her current role as project manager she earns £33,000. This position is on a fixed-term contact which ends in June 2013.

At present, Pam's biggest debt is a £3,300 loan with the Royal Bank of Scotland (RBS). "I pay around £293 a month towards this debt, but am due to clear it in July 2013," she says. "I also owe £1,900 on a Virgin Money credit card and £500 on an RBS credit card, which costs me £65 a month. In addition, I owe £1,100 on two store cards, and these cost me £75 per month."

Pam has a current account with RBS and tends to reach the £1,200 overdraft limit every month.

"The monthly payment of nearly £300 per month for the personal loan is crippling me," she says. "I appreciate I only have another year to pay on this, but I'll still be left with my other debts – plus I currently have no money put aside in savings or investments."

Pam bought her two-bed terraced house in March 2007, with a Northern Rock Together Mortgage. She has £102,000 outstanding.

"I came out of five-year fix in January 2012, and am now on a standard variable rate (SVR) of 4.79 per cent," she says. "This is on an interest-only basis and my monthly repayment is £444. As things stand, I feel trapped."

Pam is also worried about her credit rating, as when she tries to move her credit cards to more competitive deals, she gets turned down. "I'm trying to manage the debt repayments on my cards and other debts to improve my credit score, but am struggling," she says. "I know I have a reasonable amount coming in each month with no one to support but myself, and I do try to make savings where I can by making purchases through cashback site Quidco.com, for example. However, I feel I'm not able to be efficient about whittling down my debts."

A long term goal for Pam is a new home. "One day I'd like to be able to move to a similar-sized property in a nicer area," she says.

Pam has a pension through her employer and currently pays in £205.63 per month, but she has no protection policies in place.

THE CURE

Our panel of independent financial advisers agree that Pam's immediate priority must be tackling her debts, and they suggest she delays any plans to move her mortgage until she has paid off her debts and built up some cash savings.

Review spending

Pam should look closely at where she spends her money to see if she can cut costs, says Helen Kanolik from Financial Advice Ltd.

"Her situation is a very sad one, common after a divorce, but she is right that her first objective should be to clear as much debt as possible," she says. "Pam needs to review outgoings, and how much is left after she has paid her fixed bills. She should then look at her discretionary spending to see if she can trim any of it. It's hard to do, but if the situation is to improve, she may have to do without any treats for a while."

Tackle debts

Pam should begin by repaying the debt on which she is paying the highest rate of interest, assuming there are no penalties for doing so, says Patrick Connolly from AWD Chase de Vere. "She should then make a concerted effort to systematically pay off all her debt, as she won't be able to move forward financially until she's done this," he says.

Steven Poulton from Brunning Newman Houghton suggests Pam could also speak to a free advice charity, such as Citizen Advice (citizensadvice.org.uk).

"Pam is clearly in a difficult situation as her debts are consuming her salary and leaving her with very little room for manoeuvre," he says. "Citizens Advice can provide free guidance and can help investigate any state benefits or tax credits that Pam may be entitled to."

He also suggests Pam could speak with her creditors who may be willing to reduce her payments, or even offer a payment holiday. "They won't want her to become bankrupt – leading to default," he says. "It may also be possible to consolidate the debts, but this could lead to higher repayments in the long term."

Consider mortgage options

While Pam may feel trapped by her mortgage, Mr Connolly warns that her options are likely to be limited.

"If Pam has some equity in the house, this may give her some scope for alternatives," he says, "If not, it is unlikely that lenders will be keen to offer a 100 per cent mortgage to someone with debts and no savings, who is on a fixed-term contract at work and looking for an interest-only deal."

Mr Connolly urges Pam to think about whether she could afford the monthly mortgage repayments if she moved to a repayment mortgage once she's paid off her debts.

"This would mean higher monthly costs," he says. "But, she needs to remember that if she stays on her lender's SVR and rates rise, so will her monthly repayments. Equally, I'm afraid that for the time being, her hopes of moving home will also have to remain a longer term goal."

Get saving

While there is little point building savings if the interest is less than the amount she is paying on her debt, everybody should keep at least some cash to cater for short-term emergencies, says Mr Connolly.

Mr Poulton adds that this fund should be roughly equivalent to three months' salary.

"This will give Pam a little something to fall back on," he says. "At present, she is living in her overdraft, but this should be viewed as a short-term strategy, as charges can mount up quickly if the limit is exceeded."

"Cash savings will help to give Pam more options with her mortgage," says Mr Connolly. "She should look to hold savings in a tax-free cash individual savings account (Isa). While I would also usually suggest a 38-year-old should be giving some attention to longer term savings and investments, Pam isn't in a position to do so until she has addressed her shorter term financial issues."

Continue pension saving

The biggest positive in Pam's finance is her membership of the university pension scheme, says Mr Connolly.

"If Pam joined this when she joined the university she should have built up decent pension benefits," he says. "This scheme's benefits are guaranteed by the Government, and while there has been talk of changes to public-sector schemes, it will remain hugely beneficial to members, and she should retain membership."

Pam should also increase contributions when she can, he adds.

Check protection

While Pam seems to have little need for protection, Mr Connolly urges her to check what she is entitled to through her employer.

"She should have life assurance and income protection provided," he says.

Do you need a financial makeover? Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF j.knight@independent.co.uk