Take money from ISA or use 0% card with 2.5 % surcharge?

GemmaC

Hi,

I wondered if someone could give me some advice please. We are in the process of making a large purchase and I need to take £6,500 from our ISA. I also have a 0% credit card with Tesco that I could use but we will be charged the credit card surcharge of 2.5%, so £162.50. I’m trying to work out whether it’s better to just pay this surcharge to save taking the money from our ISA. In the long run, is it going to be cheaper to do this? At the moment it’s with First Direct and we’re making about £178 per year in interest (at the current rate but could probably get more elsewhere).

Should I pay the surcharge and use the 0% to pay it off or should I take the money from the ISA and then just start saving again?

Thanks

Gemma

Ditch_Crawler

GemmaC wrote: »

Hi,

I wondered if someone could give me some advice please. We are in the process of making a large purchase and I need to take £6,500 from our ISA. I also have a 0% credit card with Tesco that I could use but we will be charged the credit card surcharge of 2.5%, so £162.50. I’m trying to work out whether it’s better to just pay this surcharge to save taking the money from our ISA. In the long run, is it going to be cheaper to do this? At the moment it’s with First Direct and we’re making about £178 per year in interest (at the current rate but could probably get more elsewhere).

Should I pay the surcharge and use the 0% to pay it off or should I take the money from the ISA and then just start saving again?

Thanks

Gemma

It depends how long the 0% will last for - a 2.5% surcharge for 6 months at 0% equals an annual rate of 5%, which is almost certainly higher than what you will lose by withdrawing from your ISA. If the 0% lasts for a year, then it's better value.

GemmaC

Sorry I should have said that the 0% is for 12 months from now. However, we'd probably be looking to pay it back much quicker than that anyway (because of optimal earnings prior to December 2010).

Ditch_Crawler

GemmaC wrote: »

Sorry I should have said that the 0% is for 12 months from now. However, we'd probably be looking to pay it back much quicker than that anyway (because of optimal earnings prior to December 2010).

There would be no point in paying it back any sooner than you have to, put the dosh in an interest-paying account until the last possible minute!

But be aware that if you are also using the credit card for purchases, then as long as there is an outstanding balance on the card, your purchases will be accruing interest at a very high rate.

Ditch

GemmaC

Yes I suppose that is true!

We wouldn't be using the credit card for anything else, just this one purchase.

So in the long-run it's better for us to pay the extra £162.50 we'll be charged for using a credit card, rather than taking the cash from the ISA? I had wondered this because obviously an ISA builds up and accrues more interest over the years, the more you put in it. Originally I had thought about super balance transfers but none of the one-off charges (for example the Virgin card) looked like they were low enough to consider.

Ditch_Crawler

GemmaC wrote: »

Yes I suppose that is true!

We wouldn't be using the credit card for anything else, just this one purchase.

So in the long-run it's better for us to pay the extra £162.50 we'll be charged for using a credit card, rather than taking the cash from the ISA? I had wondered this because obviously an ISA builds up and accrues more interest over the years, the more you put in it. Originally I had thought about super balance transfers but none of the one-off charges (for example the Virgin card) looked like they were low enough to consider.

It's a complicated calculation to make! If it were to possible to pay the money back into your ISA after 6-9 months then maybe that would be a better option, but you can't! If you could earn say 3 months interest on the £6500 before the 0% deal runs out, then it would all depend on what rate of interest you could get. On a new ISA, it might be possible to earn say £40-50 in three months, which would reduce the cost of the balance transfer. Whether or not that is a good deal for you depends on the rate of interest which your Isa would have been paying for the period during which you were in need of the £6500.

I've got a headache already...

Ditch

GemmaC

I agree, extremely complicated! I am thinking now that even when worked out, it might only be a matter of a small amount difference. We aren't going to be able to heavily build up our ISAs again in the near future so perhaps I'll just do whatever seems most sensible for us now!

Thanks for all your help.