Loan or Credit Card - What's your opinion, which one first?

Clarkee21

Hi everyone,

My wife and I have been having a bit of discussion about our newly acquired debt and how best to tackle it. Purely out of curiousity I thought I'd write on here (my first time so please be gentle!!) and see what others thought might be the best approach.

The scenerio is that we recently bought a new house. As part of this we've taken a £10K loan with Northern Rock at a rate of 7.4% over 10 years (£117 a month) and used this for paying off part of the house and moving costs. We've also added the stamp duty and estate agents fees onto a credit card which is coming out at just under £5K. The credit card is 0% and I'm intending on transferring this in March when the offer expires.

My wife has just taken on a small part time job which should bring in about £250 a month. We currently intend to use all of this to paying off the credit card over the next 18 months.

My question is this though - Is it better to use her money + my current payments to pay off the loan first (reducing it by around 6 - 7 years), as it's got a higher interest rate than the card, or pay off the credit card? I'm bearing in mind most cards seem to have an avg. 2% transfer fee so this might work out costing us more annually if we just kept moving it around.

My opinion is the credit card should go first as we could 'tag' the outstanding part of the loan onto the end of the mortgage when we come to review it in two years time. Alternatively we could use my wife's salary to pay off the loan once the credit card is gone.

It's probably not a simple answer but I'd be interested to know how others would tackle this.

Thanks in advance,
James

Moneyfacts_2

Hi James,

I would approach Northern Rock and see if they can consolidate your loans into a larger amount with a lower rate (interest rates normally decrease the more you borrow, as the cost of administering the loan is proportionately lower). Northern Rock appears in our Best Buy loans chart:

http://www.moneyfacts.co.uk/loans/bestbuys/loans-10k-over-5years-without-insurance.aspx

Failing that, it may be worth applying for the M&S credit card that charges 3.9% for the lifetime of the balance, without a BT fee.

In both cases you must be wary of footprints in you credit record, that could impair your record and make it more difficult for you to get credit in the future.

With regards to including the loan within your mortgage - although your payments may decrease and the rate may be lower, if you are paying off your mortgage over a longer term the total compound interest may be much higher. It is best to consult a financial adviser.

I hope this has given you a few pointers,
Regards
M

grumbler

Clarkee21 wrote:

... Is it better to use her money + my current payments to pay off the loan first (reducing it by around 6 - 7 years), as it's got a higher interest rate than the card, or pay off the credit card? I'm bearing in mind most cards seem to have an avg. 2% transfer fee so this might work out costing us more annually if we just kept moving it around.

General rule is to pay more expensive debts (with higher APR) first. In fact there are a few credit cards left that offer 0% on BT for up to 6 months and don't charge transfer fee: http://www.stoozing.com/0fees.htm. Cards with fee offer up to 15 months 0%. Even if you pay the fee every 6 months this still equals to 4-5% APR - less than your loan one. However, this is about the same as many cards with low Life Of Balance rate offer mentioned in the post above (see the bottom of the list I quoted). So, IMHO, if you feel yourself able to get new card(s) with sufficient limit every 6-12 months, keep switching the CC debt or at some point switch it to some low LOB card(s).

If you concentrate on repaying the loan first, make sure that overpayments are allowed and reduce the total amount of interest you pay. Nothern Rock T&C have been quoted in post #6 in the Loans you can make overpayments on.... thead. For me it is absolutely unclear how much interest you could save by making overpayments.