How can I pay off my debts and start saving?
He lives in a rented property, which he shares with his girlfriend, paying roughly £700 a month in rent and utility bills.
Due to the sporadic nature of his work as a freelancer, he sometimes has periods of up to three months between contracts, which has caused Alex to run up debts. He has a credit card bill of around £4,215, costing around £400 per month. He also owes his parents £1,800, repaying around £300 per month. In total, he currently spends around £1,700 a month, giving him only £80 to clear debts.
He has no savings. His main objective is to clear his debts as soon as possible so he can start saving towards a home deposit.
Alex met Helen Howcroft, managing director of Equanimity IFA, in London to discuss improving his finances. His focus is currently on managing his debts better, with his main goal of becoming debt-free as quickly as possible. However, he is unsure how to go about this.
Howcroft says: "Having reviewed Alex's finances, they show that he has insufficient disposable income each month to clear his debts. These are costing £700 per month, representing 39% of his take home pay."
To tackle his debt, Howcroft recommends Alex transfer his current credit card debt on to a 0% balance transfer deal for at least 12 months. If he continues to pay off £400 per month he could have his debt cleared in less than 11 months. If he increased his monthly payments, he could clear his debt sooner.
The current best buy on balance transfer credit cards, according to Moneywise.co.uk Compare, is the Barclaycard Platinum with Balance Transfers, offering 0% for 26 months, with a 3.5% fee on the transfer amount, and 0% on purchases for six months.
Tesco Bank's Clubcard Credit Card takes second place, offering 0% for 25 months on balance transfers, with a transfer fee of 2.9%, and 0% on purchases for three months.
Having previously been turned down for a credit card, Howcroft says Alex should review his credit rating before he applies for another card, as rejected applications will appear on his credit file.
As it's been a few years since Alex previously applied, Howcroft believes he should also check his file to ensure it accurately reflects his debts and payment history. It has never been easier to view your credit report and Alex can do this online via credit-rating agencies Equifax, Experian and Callcredit, for just £2 for a one-off copy.
However, Alex could also get one for free as most credit rating agencies offer a free trial of their premium membership for one month. If he decided to take advantage of the trial, he must make sure to cancel the membership before payment becomes due.
In terms of repaying his parents, Howcroft recommends he discuss with them whether he might be able to reduce his monthly payment to £100, as they have told him they don't need the money back by a set date. This would give him an extra £200 per month he could use to pay off his credit card debt.
At their meeting, Howcroft looked at ways Alex could also boost his income, such as trading as self-employed. As he is usually employed as a contractor on a PAYE basis, his employer is responsible for the tax paid on his salary. As a result of this, Alex is currently paying the highest level of National Insurance.
Howcroft explains: "Generally, trading as a sole trader will have the benefit of being able to offset certain business-related expenses against his income. In addition, sole traders pay a lower level of National Insurance."
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A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
A report containing detailed information on a person’s credit history, a record of an individual’s (or company’s) past borrowing and repaying, including information about late payments and bankruptcy. It also includes all applications a person has made for financial products and whether they were rejected or accepted. Your credit report can be obtained by prospective lenders to determine your creditworthiness.