Consolidation Loan Loop

Ex partner and myself had a few debts many years ago. We took a consolidation loan to clear them BUT due to the severity, my parents took control of my/our finances so that we couldn't build up more debt nor spend money on stuff we wanted, only stuff we needed.

Although that worked for us at the time, I know for sure that it wouldn't have worked if my parents didn't take control. We would just have seen we are paying x amount less per month (even though a longer period) and would have just spent that on crap.

Fast forward to more recent times and current wife and myself have a few debts. We were going to clear them down from equity from a re-mortgage/house move - I was previously trying to service all debts. We have an overdraft each (circa 4k) and had about 4k on a credit card. I was trying to service all three and failing. Since taking an interest in these forums I realised my mistake. Three or four months ago, I changed tact to clearing as much as I can on the credit card. That is now at £1700, by the time we move and need to clear it as part of the mortgage terms, it should be about £1000. Snowballing is the better option. Its helped my sanity somewhat too - feels that we are starting to get control and once debt free, the savings on interest and charges will be considerable.

I'm going to be the voice of dissent here. Yes, snowballing is the most efficient way to pay off a number of cards. But that doesn't necessarily make it the right approach for everyone.

Take me for example. I have a £1200 overdraft, a £1300 credit card, and a £2500 credit card. It's not a huge debt, and I'm on a decent enough salary. And yet I've been coasting along with these balances for at least the last 5 years. Why's that? Well, two reasons. The main one is that they don't affect my lifestyle enough for me to do anything about them with any urgency. I can afford the repayments and just keep plodding on.

The second reason is a little more psychological in nature. Payday sees me clear my overdraft every month. That same week, all the bills are paid and a respectable payment towards the credit cards. That leaves me with a balance of less than £100 in my current account. Grocery shopping wipes that out, and the rest of the month sees me living on my overdraft.

When your day to day expenses for the entire month are made up of borrowing, a couple of things happen. First, living on borrowed money becomes normal. Going into your overdraft is inevitable, so you (well, I) accept it with a kind of "Well, let's see if we can owe a bit less at the end of this month" attitude, and when you can afford to just coast, there's really no urgency to deal with it. Second, it's hard to get motivated to deal with it. Every time you look at your bank account, you're in the red. It makes it easy to take a 'head in the sand' approach, because you know you're not going to be refused money, but it's depressing to see negative numbers all the time. Third, when you're not particularly motivated to pay things off, you have disposable cash in three different places. Sure, you might be near your overdraft limit, but you have your card to fall back on. You're not actually exceeding your limit, so what's the problem?

JP1978 above was fortunate enough to have parents to take control of his spending. I'm not that fortunate, so my approach now is to simply remove the temptation. I just took a £5000 consolidation loan to pay off and close both my cards and reset my overdraft to zero, with no need to fall back into it again. The loan is from the same provider as my current account and one card, so they're going to pay those off for me, close the accounts and remove the overdraft, and deposit the remainder for me to pay off my other card. It means I have an extra bill each month, but I'm fine with bills - it's disposable money that kills me every time. I can't 'reborrow' from a loan like I can with a credit card, so by allowing me to close my credit card accounts, it leaves me with a single bucket of money with a clear stopping point at £0, rather than £0 being this imaginary spending line that I'm inevitably going to go past because I can't even afford groceries otherwise.

On the raw figures, I might be capable of clearing the cards for less than the interest on the loan. But I've been trying that for years and just coasting, so the time has come to simply remove it. A credit card is supposed to be a safety net, but when it's maxed out every month, it's not a safety net anymore, it's just a crutch. If you're the sort of person who will inevitable keep reborrowing from your card (like me), then moving to a loan might be the only way you'll ever actually get rid of that last bit of debt.

The loan interest is lower than either card and the overdraft, so paying back the same amount each month will be cheaper. But for me at least, that's not the primary driver. I'm getting married next year, so this is about taking control of my money before it becomes a bigger issue, and clearing up my financial picture for both me and my fiancee. I want to:

1. Regain clarity over my budget. When I show my fiancee my balance, she gets upset because it's invariably a negative number and she believes that means we're in a terrible position and can't afford anything for the rest of the month. At the same time, she sees the credit cards and believes that's money that we can spend on the wedding. A single bucket of money where we're working to zero instead of -£1200 means we can budget for the wedding without dealing with the extra complexity and stress of trying to simultaneously clear an overdraft.

2. Remove the temptation to keep dipping into the cards. The cards are in good standing and will likely be offered an increased limit in March/April next year. That's just begging to be used up on wedding things with the promise that "we'll deal with it after the wedding", and that's not how I want to start married life.

3. Actually clear the debt. A card is a rolling balance that you should really try to clear, but it's not like you've really got to, and those fancy wedding invitations are really nice. A loan is a simple fixed amount that means we're debt free in November 2019.

Moderating spending is of course the only way to really address the debt, but doing so becomes a lot easier if you can simplify the budget a little.