Wealth Check: Trapped by lack of a credit record

We give 'Independent on Sunday' readers a financial makeover
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The debts accrued during Tony Hannon's student years are still proving a burden to him - even though he has been working for the past three years.

Earlier this year, he consolidated his student loans and credit card debts into a £6,000 loan from his bank, Barclays, paying interest at 19.9 per cent.

He was not happy with the rate or the service and, in January, approached HSBC with a view to switching current accounts. However, his credit rating, and the fact that he had no previous relationship with the bank, meant he was offered only an instant access savings account with limited facilities.

He cannot, for example, go overdrawn on his account, and he has a Solo, rather than a debit, card - which is not accepted in all shops. Tony has inquired about converting his HSBC account into his main current account, with full credit facilities. But he was told this could only happen if he used it more regularly, and demonstrated that he was able to manage his finances.

"There seem to be so many barriers to switching banks," he says. "I feel trapped with the one I have."

But if he can move his current account to HSBC, he hopes to replace his present loan with one from that bank - provided he is offered a better rate.

Tony also wants to increase his savings. He has £300 saved so far in his HSBC instant access account, and pays in £50 a month. But he would also like to start paying into a mini cash individual savings account (ISA).

As for his pension provision, Tony is eligible to join his employer's scheme and plans to start making contributions by the end of the year. Having spent the past three years renting, he is also keen to get a foot on the property ladder.

"By this time next year, I'd like to be in a position to get a mortgage with my flatmate," he says. "But I think this would have to be a 100 per cent or interest-only loan." He has no protection policies in place.

Interview by Esther Shaw

The patient

The patient: Tony Hannon, 26, from Westferry, east London.

Job: Public affairs consultant.

Income: £22,400.

Savings: £300 in an instant access account.

Goal: To get a better deal on his current account, start paying regularly into an ISA and a pension, and to get a mortgage.

The cure

Tony needs to decide where he is going to bank, and work on building a relationship, says Kevin Anderson from the independent financial adviser (IFA) Budge & Company.

He recommends Tony speak to the Nationwide building society, which may offer him a better deal than he has now.

Alternatively, Tony could move to internet or telephone banking, says Alex Pegley from the IFA Calculis. Smile, for example, pays 3.25 per cent on current accounts, and charges just 9.9 per cent on overdrafts.

Ben Yearsley from the IFA Hargreaves Lansdown advises Tony to start by getting a grip on his short-term finances and drawing up a monthly budget. Finding a cheaper loan must be a priority, he says. Tony should also have rainy-day money saved up - around six months' worth of salary.

Debts

Barclays is charging Tony "sky-high interest rates" on his loan, warns Mr Pegley. "He needs to rid himself of this as soon as possible," he says. "If he is allowed to make overpayments, it would soon be worth it, even if it involves belt-tightening."

Tony could also look into switching his loan. Sainsbury's Bank, for example, offers an annual percentage rate (APR) of 6.5. But Mr Yearsley warns he could incur penalties in doing this.

Savings

Tony should move his money to an ISA, says Mr Anderson. Yorkshire building society's internet ISA pays 5.2 per cent.

He should set up a monthly direct debit from his current account into his ISA, adds Mr Yearsley.

"This is a good discipline - and he could use this money later as a deposit for a flat."

Property

Waiting for 12 months before buying a property might not be a bad idea, says Mr Yearsley.

"It is likely that interest rates will be lower then, and this would also give him time to pay off some of his debts and maybe save up a small deposit."

He suggests Tony thinks carefully before taking out a 100 per cent mortgage - the rates are not competitive.

Mr Anderson advises Tony to save up at least a 5 per cent deposit.

Retirement

The longer Tony leaves taking out a pension, the harder it becomes to save a reasonable retirement pot, warns Mr Yearsley.

He should join his firm's pension scheme immediately, adds Mr Anderson - especially if the company contributes.

Protection

As Tony is single and has no dependants, he has little need for life cover at present, says Mr Yearsley.

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 s.dunn@independent.co.uk

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