This time last year, when Michelle O’Connor first put herself up for a Money
MoT, she was struggling with a mountain of debt. As a start, she took the
advice to kick her Duran Duran “habit”. A fan since the age of 7, she spent
money she didn’t have on the reformed group’s UK and European concerts.
However, the main cause of the assistant psychologist’s debts was her
studies.
After taking a degree in psychology she had found it difficult to fulfil her
ambition of becoming a clinical psychologist because of the lack of training
posts in the NHS, so in 2004 she took a masters degree in forensic
psychology to increase her options.
Michelle received financial help from her mother while she was studying, but
she also ran up credit card debts. After falling behind with the payments
she made the regrettable decision to consolidate her debts with a £6,000
loan in December 2005. Her poor credit rating meant that she was unable to
get the loan from a high street lender, so she went to a specialist loans
company that charges a punitive 25.74 per cent per annum for the five-year
loan. On her £16,500 salary, the monthly repayments of £196 made it
difficult to meet living expenses and she ran up further credit card debts
of £3,800.
Our experts advised her to reduce her spending, cut up her cards and
concentrate on repaying the debts. She also wrote to her creditors to ask if
they would accept reduced payments and freeze her interest.
Michelle says: “Barclaycard simply ignored my letter, but Capital One was
fantastic. It agreed not to charge me interest for six months and allowed me
to pay only £5 a month. Alliance & Leicester was useless. It said
it might help me if I spent nothing on my card for six months. Even worse,
it closed my bank account without warning. I was without it for two weeks,
even though my salary was going in.”
One year on and Michelle has a new job as a senior assistant psychologist,
earning £23,000. “I still hope to become a clinical or forensic psychologist
one day,” she says.
However, she did suffer a setback with the new job when the Criminal Records
Bureau, which vets the applications of those working with children and the
vulnerable, was so slow that she ended up unemployed in December and
January. This led her to start using her credit cards again.
On the brighter side, she did find out that she could claim tax relief on the
cost of her professional registration, dating back six years. “I received an
£800 tax refund, which I used to help to reduce my Barclaycard bill,” she
says.
Michelle still has £3,450 on her credit cards, as well as her loan, but now
hopes to pay them off faster. She is switching to a Halifax current account
and has applied for its 0 per cent credit card and hopes to move her loan,
too. She is also reclaiming overdraft charges on her previous account. After
a year in her job she can join her employer’s pension scheme.
Now on a sounder financial footing, Michelle has decided to treat herself to
tickets for the Live Earth concert to see Duran Duran playing. “The events
are in London so my travel costs will be minimal,” she adds.
Michelle O’Connor: what the experts say
BUDGETING
Keith Tondeur, national director, Credit Action
“It is reassuring to see the progress Michelle is making. If she continues
along these lines, I believe that she will be debt-free before too long. As
such, she can treat herself to the odd Duran Duran concert.
“Many of us suffer reverses such as Michelle did when the Criminal Records
Bureau delayed her starting her new job. But Michelle has still made some
giant strides in the past year by increasing her salary and at the same time
reducing her spending on items such as mobile phones and gym membership.
“Keeping a record of her spending in a notebook has obviously helped, but
Michelle should continue to review her budget once or twice a year and
adjust for any change in circumstances. She needs to keep checking, too,
that she has the best deals for utilities by visiting a comparison website
such as www.uswitch.com.
“I would encourage Michelle to join her employer’s pension scheme and start
saving regularly. She is making real progress and by keeping a close eye on
her finances, her patterns of behaviour will change permanently and keeping
out of debt will become a state of mind.”
CREDIT
Stuart Glendinning, director, Moneysupermarket.com
“As a tenant rather than a homeowner, Michelle may find it more difficult to
secure a more competitive personal loan. If she is successful, this would
prove positive as long as there isn’t too high a redemption charge to get
out of her current loan.
“Michelle may also struggle to get a credit card offering 0 per cent for
balance transfers, but if she is successful, then every penny Michelle can
repay during this period will go towards clearing the debt, provided that
there is no further card spending.
“Michelle’s agreements with creditors to reduce her monthly outgoings will
have left a record with the credit-reference agencies. The combination of
being a tenant and having some history of payment problems makes obtaining
cheaper credit a slim prospect. This means that she has to be especially
shrewd with the money she has and the way that she tackles her existing
debt.
“In addition to trying to recover excess charges after switching her bank
account, Michelle should write to Alliance & Leicester to request
compensation. She should explain all the problems that occurred as a result
of the enforced and unreasonable closure of her account.
“Finally, I think it would be better to delay setting up the pension until the
debts are paid off. She should also continue to list her expenditure and use
every spare penny to reduce debt.”
MONEY MANAGEMENT
Mark Dampier, head of research, Hargreaves Lansdown
“Michelle still needs to be strict on her budget. She is fortunate to have had
quite a considerable pay rise and most of this should be channelled to pay
off her debts as quickly as possible.
“After this, I believe that she should build up an emergency fund. Her
situation highlights how problematic it can be if you have no money in
reserve. For example, the two months that she had to wait for references to
come through has caused her hardship. This is what an emergency fund is for
and it seems to me that too few people have thought about why this is so
important.
“For her emergency money, I would suggest a cash Isa, in which she can deposit
up to £3,000 and receive interest tax-free. National Savings &
Investments currently offers the best rate on the market, at 6.05 per cent.
At 33, though, Michelle’s real problem going forward is a pension. She
should, therefore, join her employer’s pension scheme as soon as possible
and put some contribution of her own into it as well. She should do some
homework before she joins and find out exactly what kind of occupational
scheme is offered.
“Although retirement may seem some way off, pension planning is all about time
– the longer you have, the better. State funding is likely to be negligible
by the time Michelle retires and her age group, in particular, will be
extremely vulnerable to poverty in old age, given that far too many of them
seem simply want to spend their money on holidays.
“All in all, I think Michelle has made a fantastic start to putting her life
back together. It is no easy feat to give up the things you like, but she
has gone a long way towards it. If she continues to concentrate on paying
off her debts, I would have thought that she would be relatively debt-free
within a year or so.
“Then she can start planning her future and enjoying life more to the
full.”
Michelle’s response
“I would like to start off by thanking everyone who has given me advice. I
have tried to act upon it as much as possible. The time that I spent
unemployed really highlighted to me the importance of having savings.
“My intention is to join the pension scheme as soon as it is available to me.
In addition, I will soon have some private work coming my way.
“I will put the money from the private work in a savings account and, once I
have a healthy balance, will use it to pay off some of my credit cards.
Every six months I apply for a new credit card with a 0 per cent interest
rate. This has been unobtainable so far, suggesting that my credit rating
still isn’t great, but I’m sure that I will be successful eventually.
“I am hoping to claim back bank charges of about £3,000, which would go a long
way towards clearing my credit cards. I was unaware that I could seek
compensation for the enforced and unreasonable closure of my account, so
this is something else I will be looking at.”
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photographed.
Did she follow our experts’ advice?
Cancel gym membership: Yes.
Reduce mobile phone bill: Yes, she negotiated a new tariff.
Keep a spending record: Yes, and she spent less doing this.
Ask her family to help her to pay off her loan early: No.
Manage debt with the Consumer Credit Counselling Service: No, because
it would have affected her longer-term credit rating.
Pay more than the minimum credit card repayments: Yes.
Take a temporary second job: Yes.
Sell her car: No, she needs it for her job.
Cut down on holidays and Duran Duran concerts: Yes.
Cut up her credit cards: Yes.
