Third degree burns from student debts

I am 26 and an account manager for a London advertising agency, earning £29,600. This gives me £1,756 a month after tax and my Travelcard loan. In fact I am a bit better off now because I have just won a year's free travel through a competition in The Tube magazine.

I have been working in this industry since leaving university in 1998 and I feel the need for a change of direction, perhaps working in the arts sector or in TV. But I would have to take a pay cut, maybe embark on further education, and this could involve taking time off. The problem is I am still paying off debts from university which total £456 a month. Though manageable, I still won't have paid off my debts before 2006 when I will be 30.

My HSBC loan is a consolidation of my previous loan, credit card and overdraft from when I was seriously overdrawn earlier this year. I have looked into consolidating the others but have been refused low loan rates because of my poor credit history.

I pay £460 a month including bills to rent a shared house in Clapham but am desperate to rent my own place. I would love to buy one day but would not want to be tied into a mortgage in case I decide to change career or go abroad. I have no savings for a deposit and couldn't afford to live in the areas I would like to in London.

My only savings are £12 a month into an AXA Sun Life plan with life insurance and a guaranteed £10,000 payout when I am 40. I know I need to think about a pension but can't afford the amount I need to contribute to make a liveable retirement sum. My employer has a stakeholder pension but I am not sure how long I will stay in this job and am nervous about the current press reports saying pensions are not very secure. My other expenditure goes on going out, holidays, food and my mobile phone bill.

I recently had a pay rise and after Christmas want to start saving another £100 a month.

Action plan

You must get a tighter grip on your budget before you
can afford to rent alone, fund a career break, contribute
to a pension and clear your debts. With free
commuting, after tax, rent and household bills you
have around ?1,350 a month left, but ?325 goes on
interest charges on your ?15,000 debts and ?50 to a
clothes catalogue.

You say your budget doesn't work and spend more
than the ?40 a month that you set aside for food. You
must be more realistic. You've done well to cut up your
three credit cards, but are repaying only the minimum
each month which barely eats into the capital.

I asked Barclaycard to reduce the interest from the top
rate of 17.9 per cent. They won't because of your poor
repayment history, and point out that you have been hit
by late payment charges in five out of the past six
months. You can avoid these by setting up a direct
debt to make the payment on time each month. To get
you started, Barclaycard agreed, as a special
concession, to refund your last three penalty charges
totalling ?60.

You can save more money by paying off your debts
faster. Repaying the Barclaycard debt of ?1,800, at the
minimum ?60 a month, will take you 41 months to
clear and cost ?590 in interest charges. If you doubled
the repayments to ?120, you would clear the debt in 17
months and pay only ?245 in interest. That is ?345
more in your pocket.

When you've been repaying the HSBC managed loan
for a year, contact the bank again. If you have
maintained payments punctually, HSBC says it will
review your file and may move you to a cheaper
personal loan. But you must demonstrate that you're
being responsible so again set up a direct debit.

I'm worried that you don't have any emergency money,
even for those surprise social occasions which send
your budget off course. You won't begin saving before
Christmas but, at the start of next year, use the ?60
you would have paid on Tube fares and ?100 from your
pay rise to pay off your debts faster and start a savings
account. Concentrate on reducing the most expensive
loan as that will give you the best return. If you think
you can't afford to put enough into a pension to provide
a comfortable retirement, what do you think you will
have to live on? Despite this, wait until you have
reduced your debts before starting a pension.

Wait even longer, until you have a better credit record,
before thinking about a mortgage. With a bad credit
record you won't get any special deals. Rents are
falling and you should be able to negotiate a
reasonable price if you strike out on your own, but stay
sharing until you can see the end of your debts.

You might cash in the Axa investment, but you'll
probably get back less than you've paid in premiums.
Carolyn Corless, a certified financial planner, said:
'This sounds suspiciously like an endowment policy. I'd
be surprised if such a small premium produced
?10,000 in just 15 years' time. She should check if that
figure really is guaranteed.

'Endowments are generally not a good way to save as
part of the premium goes to pay for life cover. She
would be better off with a pure investment contract
such as a unit trust or investment trust savings plan.'
Few of them will accept such a low contribution, aim
for nearer ?25 a month.

If you cannot afford that, go for a cash Isa instead.

Joanne's plan

1. Scrape together as much money as you can
each month, if necessary curtail your social life.

2. Put some money into a deposit account for
unexpected social occasions or emergencies.

3. Use the rest to repay your debts faster,
concentrating on the one charging the highest
interest.

4. Set up direct debits to repay your credit cards
and loan punctually each month.

5. Ask HSBC to reconsider your case once you
have been repaying the loan for a year.

6. Consider cashing in your AXA policy.