Wealth Check: 'We need a better credit history to buy a bigger house'

A debt management plan dented a young couple's credit rating, but they are now in a stronger position to start saving thanks to a second income


THE PATIENT

Mother of three Freya Fowles wants to build up her credit history so that her family can move to a larger house. Freya and her husband, Nathan, both 32, currently live in a three-bedroom home in Derby with their three children, Bronwyn, seven, Harriet, four, and Emily, three.

They bought the property in July 2005 for £107,000 and have about £92,000 outstanding on their First National repayment mortgage.

"We currently pay about £450 a month on a variable rate deal, and have never missed a payment," says Freya. "But we are now keen to move to a bigger house and relocate to the Yorkshire Dales."

Crucially, in order to do this, the couple need to rebuild their credit history which has been badly affected by a debt management plan which they went on to in 2006.

"We paid off our debts last year, and want to move forward from here," says Freya. "We are now more in control of our finances, and although Nathan has a Capital One credit card, and I have a Vanquis credit card, we pay these off in full each month; the rates on these are about 34 per cent."

Further to these, Freya also has an Ikea store card with a balance of about £700, and a Marisota store card with a balance of £300. At present, the couple have very little money in savings. "I have been slotting away £10 a week in a Norwich & Peterborough regular saver account," says Freya. "But I recently withdrew the money saver up to deal with unexpected bills. That said, I do try to save money when buying items by making purchases through cashback site Quidco."

The couple hope their financial situation will get a little easier when Freya starts her new job as an English teacher in September. "I've just finished my postgraduate certificate of education (PGCE) and will start at a local secondary school," says Freya. "I will be at the bottom of the main pay scale earning about £21,500 – but it will certainly help having two salaries coming in once again."

Nathan works as a control systems engineer on a salary of about £31,000, and also brings in an additional £5,000 a year in bonuses and overtime.

The couple are keen to build up their pension savings, as Freya has made no contributions since being made redundant in 2009. Nathan pays about £100 a month into an employee pension scheme, and has done this since he started in 1997; he has accrued 14 years in a final salary scheme. Freya and Nathan pay £14.18 a month for life insurance with LV=.



THE CURE

Our panel of independent financial advisers (IFAs) agrees that despite having some difficulties in recent years, Freya and Nathan have done well to keep their heads above water. As they now have good jobs, a settled family, plenty of disposable income and manageable debt levels, they should have a bright future ahead of them. By clearing the short-term debts and saving hard for a while, they should be able to achieve their goal of relocating to a larger home in the Yorkshire Dales in the not too distant future.



Rebuild your credit rating

While Freya and Nathan have now repaid most of their personal debt, their debt management plan will have affected their credit score, warns David Brunning from Brunning Newman Houghton.

"Although the couple will soon have two incomes and seem to have resolved their debt problems, their credit history will have a bearing on their future ambitions," he says. "On a positive note, the credit cards that Freya and Nathan have are actually advantageous in terms of rebuilding their credit rating. They can also prove their credit worthiness by repaying the balance before it falls due, and by ensuring they are both registered on the electoral roll."



Budget carefully

The additional income provided by Freya's job will be invaluable, and although it may be tempting to buy treats for the children, the couple need to get into the habit of setting accurate household budgets, says Lorreine Kennedy from Carematters.

"This will help them to understand exactly where their money goes, and also show them how much they can afford to repay off their remaining debts," she says. "Although the store cards have relatively small balances, the Marisota card has a rate of 39.9 per cent. Clearing these debts has to be a priority."



Be realistic about the costs of relocating

According to Ms Kennedy, a three-bed house in the Dales could cost from £250,000 to £400,000. "Stamp duty is charged at 3 per cent above £250,000, and this, together with associated costs, can easily amount to £12,000," she says. "Most lenders now want a 20 per cent deposit – and more if the credit history is poor."

David Penny from Invest Southwest add s that as their house is likely to be similar in value to when they bought it, this will give them less than 15 per cent equity.

"This, combined with their recent credit history, and Freya not yet being employed, will deny them access to the best mortgage deals," he warns.



Build up savings

In order to realise their ambition to move to a bigger house, the couple need to build up considerable savings.

"Freya and Nathan's savings are minimal, as can be expected after a period of unemployment and study," says Ms Kennedy. "In addition, having three young children will no doubt have affected their ability to save. Nonetheless, while Freya will become a teacher on the lowest main pay scale, there is scope for good and ambitious teachers to earn considerably more – and up to £56,950 for advanced teaching skills. The couple will soon settle into a comfortable culture of being a dual-income family, and should make a commitment to put a financial plan together to achieve their goals."



Save regularly

As soon as they have cleared their short-term debts, Freya and Nathan should build up an emergency cash reserve, says Mr Penny. "This should be equivalent to at least three to six months of outgoings," he says. "An instant access cash individual savings account (ISA) provides the perfect vehicle for these funds as it is tax efficient. Northern Rock is currently paying 2.8 per cent with no bonus."

Mr Penny points out that by building a nest egg, Freya and Nathan will be able to secure a more competitive mortgage deal when they relocate, as they will then have stable employment and plenty of equity.



Pension saving

"Freya should join the teachers' pension scheme at the earliest opportunity, as despite the recent protests and strikes, public-sector schemes remain extraordinarily generous," says Ms Kennedy.

Mr Brunning suggests the couple contribute the minimum amounts to remain members of their respective pension schemes, and look to increase contributions when their finances are more settled.

Mr Penny also urges Freya to take advice on her old pension scheme to check whether it is cost effective and still being invested well.



Protection

With three young children, no current savings, and seemingly little life cover, the couple need to think about protecting themselves and their children from the financial turmoil of death or serious illness, says Mr Brunning. "I would suggest a term assurance and critical illness plan – to cover the mortgage at the very least – and if funds allow, they could look to protect their incomes with a family income benefit policy," he says.

Ms Kennedy adds that becoming a teacher will bring invaluable benefits such as death-in-service and sick pay. "Nathan should also check with his employer to see what benefits are available," she says. They should also keep their wills up to date.

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

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