Advice needed - my plan to clear debt, am I doing right thing?

loomysenior

I've had a loan for almost 6 years now which has been a real millstone around my neck. Rather foolishly over the life of the loan, I'd taken out PPI and also renegotiated it twice for a top-up. Added to that I'd taken a few payment holidays...of course, this was in the days when I was useless with money!
I'm now looking for ways to make savings in the last year or so of the loan/clear my debts early. I've come up with a plan to try and improve the situation, but I'd like anyone to offer me any advice, point out any possible flaws or make suggestions. Like to point out also that I have real problems with numbers (I swear I'm dyslexic with numbers - disnumeric?) so there may be glaring errors...it's taken me about a week to do! :rotfl:
I'll outline the current situation with all my debts, then outline the plan!

Loan: Egg Loan
End date: February 2008
Monthly payments: £267.12
Interest rate: 6.9%
There is no early repayment penalty and I can pay more than the monthly payment if I want every month.
The loan has PPI
Total to pay: £4808.16

So far, I've rung up Egg and asked them to take the PPI off of my loan which they've done (I wish I'd realised what a waste of time that was before now!).
This makes the loan:

Maturity date: January 2008 @ £267.12 p.c.m.
My final settlement figure (as of beginning of this month, valid until 19th August) is £4,279.37

In addition to my loan, I have an Egg credit card which has £2,058.79 on it consisting of:
£1,427.08 purchases
£631.71 balance transfers

This is at the promotional rate at the moment. My 0% purchases ends on 1st September and my 0% balance transfer rate ends 1st December. Obviously I'm pretty close to the promotional period on purchases.
I'm paying the monthly minimum at the moment of £42 and I asked them to remove the PPI from the card, which they've done but they said that it would take 30 days before they could remove it (rang them 20 days ago and this month's PPI of £16.26 will still be going out on the 23rd of August :mad: )
The Egg card has an anniversary offer giving me 0% rate on balance transfers for 5 months starting in March 2007 (until July 2007).
I also have a Barclaycard Initial which has been completely paid off for about 6 months but it hasn't been closed.
Barclaycard have an offer until the end of this month where I can transfer a balance to them (with no handling fee) at 6.9% for the life of balance. My credit limit is £750 and I can transfer 90% of my limit, so £675 can be transferred (though I could always ask for an increased limit - the Barclaycard was my first credit card ever, so the credit limit was pretty low)

Lastly I have £1,025 sitting in a Halifax ISA. I saved it last tax year 2005/06 but haven't touched it or transferred it. The rate is 4.75% - my allowance for this year is still £3000.
I have no other store cards or loans, though in December I will be £83 a month better off (a PAYE tax deduction ends then) and I'm also in the process of claiming back about £450 ish of bank/credit card charges which if successful I will use to pay off my debt. My current account is Barclays Current (ditched the useless Additions this year!) with a pathetic rate of in-credit interest (it's 0.1%). I have an overdraft facility but I'm in credit (have been for last year or so).

In total:
debt: £6,338.16

Of that debt:
£631.71 is at a rate of 0% for another 3 months
£1,427.08 will be at the rate of 15.9% (typical variable) next month (Sept 1st)
£4,279.37 is at 6.9%

Payments:
£267.12 per month of my loan
£42.01 per month credit card (minimum payments)
= £309.13 a month

My plan is this:
I was thinking of applying for the Post Office credit card which has 0% BT for 6 months. If I can get a high enough credit limit I could transfer my loan to it for that 6 months.
I'm also about to open a new current account with A+L which gives 5% interest on in-credit balance and gives you a fixed-savings account with 10% interest. I'm holding back on this until September as I've heard a rumour that the rate for new customers goes up to 6% in-credit and 12% savings then.

---

Best case scenarion: transfer total debt of £6,338.16 (including the £631.71 that is still at 0% for another 3 months)

Minimum payment 2% per month (most cards seem to be about 2% min):
£126.76
Was paying £310 a month (rounded up), so I can save about £180 a month into the 12% (lets say 10% to be on the safe side) savings account which makes £1080 saved after 6 months. I'll have paid 760.56 in minimum payments. Remember as well that as of January, I'll be £83 better off a month after finishing a monthly tax deduction from my wages, so the last two months of the BT, I'll be able to pay an additional £166 (should I pay this to my card in addition to my minimum payment or save it in a separate savings account?)
That makes £926.56 paid off of the balance transfer by the end of the 6 month promotional period.
The minimum payment reduces every time I make a payment but for the sake of this illustration I'm putting a fixed amount to make the sums easier

After 6 months: (Feb 2006)
£926.56 paid (min payments)
£1080 saved (in high interest account)
Total: £2006.56

******
Running debt subtotal (payments and savings offset against remaining):
£6,338.16
- £2006.56
= £4,331.60
******

Then I'll have to tart to find another 0% card - a minimum of 9 months promotional, preferably 12 months.
Let's say for argument's sake that fee free 0% transfers are rarer than hen's teeth in 6 months' time. The average BT fee seems to be about 2.5%. My remaining debt to transfer will be £5411.60 (£6,338.16 - £926.56 of minimum payments over 6 months), so the BT fee will be about £135. That makes the balance on the credit card £5546.60
I can afford to pay £310 + £83 a month (what I'm already paying in debt repayments a month remember), so £393 a month.

Minimum payments on £5546.60 at 2% will be £110.93 (on initial amount, obviously decreasing as time goes by) per month, therefore I can make the min payment and save £282 a month. £180 goes into the 10% saver as usual, leaving £102 odd to go into an ISA (I can still save up to £3000 this year remember -).

After a further 6 months:
£1080 in 10% saver
so £2160 saved in total - I am now able to withdraw the money in the high interest saver account
Using the formula (0.1/12) x 78 x £180 my interest earned at 10% Gross AER is £117, less 20% tax (£23.40) = £93.60
So total saved in A+L saver account = £2253.60
(Assuming my calculations are correct!)

£665.58 in minimum payments

£612 in ISA (let's say the ISA is 5% AER, so is this a correct way to work out the interest?: £102 x 21* x (0.05/12) = £8.93 interest)
*(normally you'd use 78 (i.e. 12+11+10+9+8+7+6+5+4+3+2+1) for the interest over 12 months, so is 6 months a figure of 21? (6+5+4+3+2+1))
ISA total £620

The emergency £1025 also invested in an ISA a year ago at a theoretical 5%AER giving £27.76 interest
£1052.76

Debt:
£5546.60 (starting amount after transfer) - £2253.60 (A+L 10% saver) - £665.58 (minimum monthly payments) - £620 (overflow invested in ISA) - £1052.76 (emergency money in ISA)

New debt total £954.66 after 12 months
3 - 6 months remaining of 0% rate (we'll say 3 months to be on the safe side in case I couldn't get a 12 month period of 0%)

By now the minimum payment is approx £19
£374 can be saved for interest from my monthly repayment allowance of £393

After 2 months £786 paid off
Final month, last payment of £168.66

To summarise:
With credit card system, loan paid off in full after 15 months, 3 months earlier than if I'd carried on paying the loan the usual way.
Don't know how to work out how much I've saved by doing it this way, but that's 18 months' worth of 6.9% interest I'm not paying!
The amount may be paid off earlier as any spare money I have at the end of the month I can put aside in the ISA. It's possible that I will be getting a bonus at the end of the year (not counting chickens though!), so anything I get I will use towards the debt. I'm guessing that it would be better to pay it into the saving account rather than the card and only pay the absolute minimum amount each month still. Any suggestions for the savings too - any tips for where would be best to invest it?

Phew! Sorry it's a bit of a long post - I really appreciate anyone that makes it to the end and thank you in advance for any feedback! I need to move fast as promotional rates are coming to an end, so I'm a bit desperate for info! I will keep you updated as to how it's going if that would be helpful.


NOTE: There will be some slight inaccuracies as for ease, I've assumed that the minimum payment is the same every month when of course it goes down each month as it is a percentage of the remaining debt rather than a fixed amount.

Also - I guess it's better when doing a balance transfer that I use the money that I've saved to pay off some of the balance beforehand so that the BT fee is less!

Annie_Fanny

My eyes are boggling reading your post!

Have you had a look at http://www.whatsthecost.co.uk/snowball.aspx ?

(Just talking aloud for this bit...) Could you use the ISA money to pay off part of the Egg card once the promotion rate runs out? So would pay off £631.71 of balance transfers and £393.29 off purchases leaving you with £1033.79 @ 15.9%? Have you checked this APR is correct with recent rises - may even be higher?

Don't forget that the A&L current account has a 0% overdraft for a year and you get £50 for signing up! AND are you signed up to Quidco? Do it because you can get cashback for signing up thru' Quidco to A&L! Quids in!

Annie

loomysenior

That's an interesting link Annie, thanks for that! I hadn't considered snowballing - I've never heard of the term before!

Psychologically it's important for me to pay the loan off as soon as I can; it was taken to pay off some business debts when my company folded, so it's not as if I've ended up with anything concrete or an asset at the end of my loan, like a car or home improvement. Having it hang over me for the last 6 years has been a bit like dragging around a ball and chain. It's especially painful because I can't afford to get together a deposit for a mortgage, so I'm in my mid-thirties and not on the propery ladder and I don't have a pension. Clearing the debt would mean a great deal to me.

I also realise too that I shouldn't let emotion cloud my judgement when it comes to these matters and if snowballing could help me out, then it will certainly be considered!

I am signed up to Quidco...I'm a convert!

Back to the possibility of using 0% BT cards as interest-free loans, is it a good idea or is it risky?

gallygirl

It's a good idea to use 0% ccards BUT - 1) only if you stop spending on them and continue to save as much as possible each month because 2) evetually (or sooner rather than later) you'll becomne known as a rate tart and be rejected. So if you don't have the savings by then you could end up paying a horrendous APR.

Your scenarios are too complex for this late on a Saturday night!!!!! But I'm all for keeping things as simple as possible. You're playing with figures but the reality is it's not reallyw orth all teh effort - you're likely to forget 0% end dates etc. One thing you MUST do though is use your savings to reduce your debt - lets hope Martin doesn't read this because if he does he'll have your guts for garters :money: :money: :money: :money: - what's the point in having savings at 4.75% and paying 6.9% interest - especially when you can overpay with no penalty. And as for the 15.9% form Sept on your CCard:eek: :eek: Do it NOW!!!!!!!!

I thought you weren't good with numbers?????

loomysenior

Hi Ali - the lightbulb has only been switched on in the last couple of months, but I'm learning fast! The Egg card was supposed to help me pay off the balance of the Barclaycard but I stupidly forgot all about it and carried on paying the minimum payment but not saving the remainder. I shan't make the same mistake again - I'm gettin' organised for once!

1) If I apply for another card for the 0% transfer, I will stick it in a drawer and not use it for purchases. I was trying to help my partner out with a few bits and pieces for his new job (clothes, equipment etc); I did a bad thing and put the purchases on my card because he thought he'd be able to pay me back in full in installments before the 0% purchase period ended, but when he found out what his wages were it turned out that he couldn't afford to pay me back!

2) End dates - I've got my iCal calendar setup to remind me of due dates and so on, so I won't miss them this time.

3) I should apply for the 0% credit card, use the £1024 to pay off as much as I can of the egg balance (as that is the greatest APR), then transfer the remainder to the new card? The Egg card is the absolute highest priority.

4) Should I keep the Egg loan with Egg (at 6.9%) and pay as much as I can each month

- or -

should I do what I suggested and use the 10% regular saver account at A+L to save as much as I can apart from the minimum payments. Is it worth the 3.1% difference between the loan and the savings? Not sure how to work out the interest. Can anyone point me in the direction of an online loan repayment calculator to work out the repayments?

Thanks everyone for your support and advice so far!

Molanole

Hi Loomy

I too am a bit baffled by all the scenarios but like Ali am up for keeping things simple. Personally, and others will most likely disagree, I would use the savings to get rid of as much of the credit card as possible. Then, and only if your credit rating is good, I would go for a 0% card to transfer away the rest of the card BUT DO NOT SPEND ON THE CARD!!!

The Egg Loan is one of the few remaining flexible loans which allows you to overpay with no penalty. Unless you could get this onto either 0% card or a lower interest rate flexible loan (are there any?) I'm not sure what you would gain by moving it.

I know you are looking for the psychological boost of clearing your loan but baby steps is always the best way. Why not clear the smaller ones first to give yourself a motivational boost, it's nice to see the amounts that used to come out of your account finally disappearing and I'm sure it will be MUCH more manageable when you only have the loan to contend with. You can then set yourself challenges to bring in more cash (quidco, ebay etc etc) so that you can throw more at the loan.

Mola x

loomysenior

Should I close my Barclaycard account down to improve my credit score or should I just keep the account open in case of an emergency? I cut the card up 6 months ago once it was paid off so I can't use it anyway.

My credit health is very good - I last got one about 9 months ago and it shows that my accounts are all up to date (as in no late payments or defaults) or paid off. There's only one blot and that is one late payment in 2004 on my Barclaycard. Of course, as per Martin's article, that doesn't necessarily mean that you'll get the financial products you want!

moozie_2

loomysenior wrote:

Should I close my Barclaycard account down to improve my credit score or should I just keep the account open in case of an emergency? I cut the card up 6 months ago once it was paid off so I can't use it anyway.

Personally I would say close it but I am not an expert. I closed all my redundant cards down recently and I now have one where I am paying off a balance at 2.9% (First Direct) and one where I use it for most of my spending to accrue cashback (Morgan Stanley).

You seem to be doing really well - pleased for you! :T

wannabedebtfree_2

Blimey...........your post made my head spin!!!

You have obviously spent a lot of time working out what you will do, but just a word of warning about the A&L regular savings account, once you set it up you cannot change the payment amount, or the payment date, so if one month you are a bit short, they will still take the savings money which could be quite painful!!

Your calculations are assuming that you will be able to get yourself a 0% BT card with a very high credit limit, and although it's sensible to transfer the Egg card once the rate changes, you might find you don't get a high enough BT credit limit to take the loan over as well.

I personally would use my ISA money towards paying off a chunk, and then sort out a 0% card, transfer as much as possible onto it, and see what happens from there!!

loomysenior

Just a question - if APR is 15.9% (which the egg card reverts to for purchases on 1st September), does that mean that the monthly interest charge is 1.325% (15.9 / 12)...or is that too simplistic a way of working it out?

Option 1: After I've paid off £1025 of the card with my ISA, I could transfer the surplus (£1033.79) to my barclaycard which has a rate of 6.9% for balance transfers with no handling fee. At least I'd be paying at a lower rate (6.9% - equivalent to my loan) instead of 15.9%. I would need to ask for a higher credit limit as at present I can only transfer £675 to it (90% of the credit limit of £750 - it was my first credit card)

Option 2: I could apply for a Post Office 0% fee-free BT card (it depends on how likely it is to get a credit limit of about 1K) but I don't want to damage my credit health too much as I want to apply for a mortgage at the end of the year.

Which option would be more sensible?

I realise that credit scoring is a black art so anything could happen!
Regardless of what I do, I think you are all right - it would make more sense to overpay as much of the loan per month as possible (I'm currently reducing my bills and outgoings as much as I can each month, and becoming a lot more frugal with my spending).

Does it sound sensible to take the in-credit balance of my account prior to my monthly wages going in, and use that to overpay the loan? (e.g. if the balance immediately before my wages went in was £180, I should pay that extra money into my Egg loan? Is there a rule of thumb for this?)

wannabedebtfree_2

I would think it would be a better idea to get a 0% card to BT to, as long as you cut up the rest of your cards and DO NOT spend, you could cancel the cards that are paid off, so that when you apply for a mortgage you only have 1 current card that you could use.

If you have surplus money at the end of each month you should be using it to throw at your debts, you'll be amazed how quickly you will be able to plough through them if you do this, BUT don't leave yourself short, sometimes its best to have a little nest egg in case something bad happens.