Pay off Credit Card or Consolodate Loan - Worried about Rate jacking

NewMan

Hi everyone - Im new to this site and Ive been browsing a few days and have found the information and advice fantastic here.

I currently have 2 credit cards that I am looking to clear;
Virgin (MBNA) for approx £6,000 Limit £11,100
Egg for approx £4,000 Limit £7,500

I have been paying minimum on these for about 6 months or so as I was getting a house extension and my OH has recently had a baby most of my money was going elsewhere, but things have settled now and I reckon I can afford to pay £250 odd per month to pay cards off.

I had applied for a loan at 6.9% to clear these debts before I visited this site and was approved. The paperwork is on its way....

However I had read advice on this site that said not to consoldate as this was a bad idea that could ultimately land me in more debt.

So on the back of this I thought, well I can just not take up the loan (ie not sign and return the paperwork) So instead I looked at my rates and see how I could better them. The interest on the Virgin card is 18% and the Egg is 19.9% but I have a promotional rate available on the Virgin and I am in the process of getting the Egg debt transferred to the Virgin one at a rate of 1.9% untill May 2011. (subject to approval-still got to wait a day or 2 before I hear anything)

I was happy to just stick to paying about £250 per month and according to snowball Id be debt free in 48 months. However worried about rate jacking. What if the rate goes up? ok I could choose to not accept it and pay the card off (I dont want to use it anyway)

I guess what I am asking is - would it be better to pay off card and deal with rate jacking if/when it comes along? or go with the loan, pay off the cards and of course cut them up?

Thanks for any advice anyone could offer

DarkConvict

Rate jacking guide - http://www.moneysavingexpert.com/reclaim/credit-card-interest-rate-increases

You can stop the standard APR increasing, but not promo deals. I.e. If they lower to 1.9% for 12 months, it will return to the standard APR. This you cannot stop.

I did have a much better consolidation comparison, showing how attractive it is then explaining the drawbacks but this will have to do.

DarkConvict wrote: »

Generally loans are front loaded, so here is an example.

£10,000 of credit card debt at @ 25%, paying back £500 a month
It will take you 26 months to pay off these debts. During that time, you'll pay £2,732.00 in interest.

£10,000 loan to consolidate at @ 15%, you will be asked to pay back at 5 years. So 5x12 = 60 months. £10,000 at 15% over 5 years is roughly £17,500 to repay.
Making monthly repayment to be £292

This shows a consolidation loan takes longer to pay back, you pay more in interest, and worse of all it bring down repayments. Lower repayments is bad for a big reason if you are in debt to the point of wanting another loan, if you have more money per month than when making the min payments on cards you end up spending again. But that £206 just isn't enough so you get a credit card, end up making min payments and then bang 12-24 months later you need another loan and have a whack load more debt.
Mentally consolidation looks good but it really just turns you over and gets you from behind much harder... is one way to put it.
Avoid at all costs!

Key thing with loans, is you are tied into the loans terms. A set monthly figure that must be paid. With cards you can adjust it to match what you can afford on a month by month basis.
Also you will find it hard to overpay a loan and gain any benefit. As loans get interest loaded on first. Front loaded loans means they can recover the full amount not just the initial amount and interest so far, as all the interest is added to start with

happycamel_2

Hi, DarkConvict, as ever has given excellent advice. Stick with the cards, lower the APR if you can and the overpay as much as you can to get the term down. If you can lower your spending by £50 a month and put that in over payments the term goes down and you've less risk of rate jacking. It'll kind of focus the mind!

NewMan

Thanks for your advice, I understand the reasons behind not consolodating - ie a loan is inflexible as I will not be able to overpay and has rigid monthly payments.

However 2 things are making me still unsure -
The MBNA Virgin card that I have will only let me pay minimum or maximum amounts via direct debit. This means I would have to make a payment manually - Im not sure I have the willpower to be able to do this rigidly every month, the temptation would be to miss overpaying. Is it feasable to set up an additional standing order somehow?

Also the APR on the balance transfer is 1.9% till May but my other existing debt is at 18% and that wont be touched until I have paid off the 1.9% debt first, then this will revert to 18%. I was thinking that if the loan is 6.9% then Im surely going to pay less interest over time? and any overpayments that I could make in a month I could send to a savings account, thus giving me an emergency fund which will ensure I dont spend any more on the card?

What are your thoughts on this.

Thanks again for the advice

david39

Regarding your concerns about the high-rate portion of the combined debt on the Virgin card being trapped behind the low-rate, this is all about to change before the year end.

The CC companies have agreed that incoming payments will be offset against the highest rate of interest first, the lowest rates being paid off last.

I don't know about Virgin but MBNA, who operate the Virgin card, have already implemented this on their own MBNA accounts.

Percy1983

In your case a consolidation isn't such a bad idea.

As you say the cards with current overpayments will take 48 months, how long is the loan for?

The loan could potentially save you money but as mentioned won't be as flexible, on the flip side if you loan is for a longer time period it may cost you a little more but keep the payments quite low.

In short there is advantages to each and there isn't a right or wrong answer.

The main thing is if you do get the loan, don't spend on the credit cards. Some will say cancel them, but if you have the self control then keep one for emgencies only.

NewMan

Hi - Thanks for all the advice Ive been given, its given me a lot to think about, I think I am clearer now.

I know consolodation loans can be a bad idea, but my loan for £10,000 to clear my cards is at 7.6% APR which isnt bad. Over 48 months, at a payment of £241 I will pay a total of £1568 in interest over the term of the loan. I know I cant overpay with a loan, but Im not sure Id be able to overpay the credit cards by much anyway.

Using the snowball calculator, if I paid £250 per month to the credit debt, "It will take you 57 months to pay off these debts if you snowball correctly. During that time, you'll pay £4,062.00 in interest." Thats 9 months more and nearly £2500 more in interest.

I do intend to cut up my cards immediately and close the accounts once the remaining interest has been paid.

I am going to set up a direct debit to pay an amount per month to my savings account (between £50 and £80) to pay for emergencies, like car repairs etc- things I would previously have used a credit card for.

I think Im doing the right thing - arent I?

Thanks

Percy1983

It does sound like a decent plan, if you have the capacity to save aswell then it can't be a bad idea.

Another thought, you can usually overpay a loan but it usually just shortens the term and does't reduce interest, adversely if you are saving and paying the loan you should get to a point where you can actually settle the remaining loan with your saving to which they can only charge you 2 months interest when settling.

As mentioned before it might be worth keeping a credit card 'just incase', a good method would be to bag it and put it at the back/bottom of your freezer, trust me you will only dig it out if you truely needed it.

Triggles

If you don't think you can put the extra amount in with a manual payment above and beyond the direct debit, simply set up a standing order on your account so that it goes in automatically each month. Then it's out of your hands as far as pushing yourself to do it.