Help me break free of debt

Brett Doolan, 38, is a psychiatric nurse with the NHS earning £28,816 a year.

He has recently moved into a friend's house in Worthing, West Sussex, and pays £375 in rent a month including bills. Brett is in the process of selling his family home, after separating from his wife, and has two children – eight-year-old Alyssa and six-year-old Owen.

He has total credit card debt in the region of £11,400 with Halifax, Egg and Virgin and his total minimum monthly repayments are £210.

On top of this, he has an overdraft of approximately £4,600 with Halifax and currently pays around £60 in fees plus interest each month. He will not get any equity share from the property, because it will go to his wife.

Brett is part of the NHS pension scheme and contributes £160 a month towards it. His debt built up during the breakdown of his marriage when he paid rent for nursing accommodation as well as the mortgage on the family home.

Brett now feels he is in a position to tackle his debt and is determined to resolve his situation: "I want to become debt-free, save for myself as well as invest for my children and have a little bit to play with to buy items that I need," he says.

Expert opinion

Pete Herdman is an independent financial adviser with Skerritt Consultants in Hove, East Sussex. He says the best way for Brett to address his situation is in stages, with the objective of paying off his debts first.

"He needs to make sure he is directing his repayments to the debt with the highest interest rate first – I would expect this to be the overdraft he has outstanding. Normally bank overdrafts have the highest interest rates because they are for short-term borrowing," he says.

A big problem for Brett is that he does not know the interest rates and limits of his various debts. Herdman says the first thing he should do is find these out so he can prioritise which loan to pay off first.

Brett should also speak to his main bank (currently Halifax) to see if it can consolidate his overdraft and credit card debt into a loan with a lower interest rate.

In doing this Brett may be able to halve his interest payments each month and start to knock off more off his debt. This would also make it easier for him to keep track of his monthly repayments.

Herdman admits he may not get the most competitive rate. "However, I still believe going in with a slightly higher loan interest rate normally works out to be better than a credit card rate."

Furthermore, despite Brett's high level of debt, since he has been keeping up his minimum monthly repayments he may still have a relatively strong credit rating.

"If his current bank is unable to give him an attractive solution to help reduce his debt then I would strongly suggest he shop around on the high street to try and get a better deal," says Herdman.

He thinks it seems unfair that Halifax continues to charge Brett a fee each month, plus interest on his overdraft, without trying to help him plan to pay his debts off. Brett thinks his Virgin credit card has a promotional interest rate of 0% and that the offer runs for a further eight months.

If correct, Herdman suggests Brett transfer as much of his other credit card debt onto this card as he can, depending on his allowed credit limit. This would cut down on the amount of interest repayments he is currently paying.

Herdman feels it is important for Brett to think about what would happen if he died unexpectedly and whether he would want to leave a lump sum for his children.

Since the credit cards and bank account are in his name only, his debt would not be passed on to anyone following his death.

Through his NHS pension scheme, Brett's beneficiaries would receive twice his annual earnings as a death benefit.

Herdman says: "Brett should update his death nomination details under his NHS pension scheme, as he may have originally nominated his wife and may wish to change it now to his children.

"He may also want to look into a life insurance policy for a minimal amount, say £20 a month, to see what level of lump sum it would pay out to his children on his death," he continues.

Brett should also check with his employer to see if it offers income protection insurance, so that if he has an accident or becomes ill while working for the NHS he will continue to receive an income.

This is particularly important given his debt level and lack of savings to use as an emergency fund.

Looking long-term

Brett could stop his pension contributions to pay off his debts quicker but Herdman advises against this. Taking a long-term view, he feels it would have a significant impact on Brett's pension provision if he stopped the contributions even for a short period of time.

"Brett is in a very good and secure final salary pension scheme with the NHS. The benefits he would be entitled to at retirement relate to his final salary and years of service – there are very few schemes which provide such generous pension benefits," remarks Herdman.

Only once Brett has paid off his debts and is in a stronger position financially is it worth him considering investing for either himself or his children.

To stop himself from getting in such an indebted state again, he should stick to a budget and build up a savings safety net of at least three months' earnings.

"Products to consider would be a regular individual savings account, a child trust fund for his younger child or possibly National Savings & Investments' Children's Bonus Bonds," says Herdman.

All of these products have preferential tax treatment and different levels of flexibility, risk and return.

Commenting on the IFA session, Brett says: "The experience has given me a sense of direction and perspective on how to tackle my debt. This alone makes it feel more manageable and less daunting or oppressive, which in turn will increase my motivation to get things repaid."

Brett's To–Do List:

1. Find out the interest rates and credit limits of his cards and overdraft
2. Approach bank for help in consolidating his debt
3. Update his death-in-service contract
4. Take out income protection insurance

Pete Herdman is an independent financial adviser for Skerritt Consultants in Hove. Visit or call 01273 204 999.

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Your Comments

These are really good points. Consolidating and paying off his debts should be the first task. If funds are tight it might be a better idea to take out a family income benefit policy for his children rather than term insurance. Family income benefit pays a monthly benefit if the policyholder was to die rather than a lump sum so it is usually a lot cheaper.