which do i pay - so confused?

Degenerate

lee1985 wrote: »

If you have two cards with similar rates but one has a significantly larger balance then you would usually focus on the one with the larger balance because even though the interest rate may be slightly less, because of the interest-to-balance ratio you are actually throwing away a lot more money by way of larger interest payments.

Er, no. Completely incorrect.

You should pay off the higher interest rate debts first regardless of the size of the balance. Then apply any money left over to the next highest interest rate and so on.

The only exception to this might be if you wanted to free up some limit on a particular card to make use of a promotional offer, as YorkshireBoy was suggesting.

chattychappy

Degenerate wrote: »

Er, no. Completely incorrect.

You should pay off the higher interest rate debts first regardless of the size of the balance. Then apply any money left over to the next highest interest rate and so on.

The only exception to this might be if you wanted to free up some limit on a particular card to make use of a promotional offer, as YorkshireBoy was suggesting.

Agree.

The exception to this would be if one had a low balance that you could pay off entirely. It can be worth doing this simply so new purchases can get the benefit of up to 56 days interest free and you might get a new offer.

In this scenario since the interest is the same I'd pay MBNA first as they might come back with a BT offer.

I would also leave some cash in savings as a buffer against not meeting minimums in the future (perhaps 2-3 months worth of minimums).

rose08

there's very little with regard to interest tbh. MBNA is slightly less as the interest is at two different rates.

If i pay the £1900 off MBNA it'll just leave a small balance and hopefully as you say they might come up with a BT offer sometime in the future.

I'd just be pleased to pay one off tbh, and then work on paying the other but i don't have quite enough spare money at the moment. i do have an overdraft facility (also HSBC) but i don't want to use this unless i absolutely have to.

many thank you' as always, R

YorkshireBoy

rose08 wrote: »

i do have an overdraft facility (also HSBC) but i don't want to use this unless i absolutely have to.

What's the EAR on that? If it's less then MBNA's APR then it could make sense to use it short term in order to settle the MBNA card and perhaps provoke a follow on offer.

That's assuming MBNA haven't been spooked by two recent, and consecutive, missed/late payments of course!?

rose08

there's no way of knowing if MBNA will come up with a BT, that's a waiting game. They might have been spooked by my missing a couple of payments as you say.

I'm not going to use my overdraft, i'm trying to keep things as simple as possible and doing that would just add something else to juggle with. I'm going to pay the £1900 off one cc and then concentrate on clearing the small balance that's left on that account, then once that's paid i'll focus on the remaining cc (job done), and with no overdraft.

lee1985

Degenerate wrote: »

Er, no. Completely incorrect.

You should pay off the higher interest rate debts first regardless of the size of the balance. Then apply any money left over to the next highest interest rate and so on.

The only exception to this might be if you wanted to free up some limit on a particular card to make use of a promotional offer, as YorkshireBoy was suggesting.

Oh I see.

Well if I had two cards, one at 17.9% with a balance of £3750 and one at 24.9% with a balance of £750, and I had £1900 to pay off, I tell you rightaway I'd pay the lot off the one with the larger balance because the interest would be ridiculous.

Yes it is true that you will always pay less interest by paying off the larger APRs even if they were only £50. But, with the scenario above it would also significantly reduce your overall minimum payment each month yet losing only a few quid. I'd rather lose a couple of pounds to interest if I would be freeing up a considerable amount of money that can be spent on other things where necessary, if you were going through an awkward few months with little money, for example. It's always handy to have a little more money to fall back as you never know when you might need it, especially when you could have an extra £30 in your pocket every month for the sake of paying an extra 3 or 4 pounds in interest.

But if you'd pay the £800... fair enough. lol. Many other people may agree, but everyone's different.

dtsazza

lee1985 wrote: »

Well if I had two cards, one at 17.9% with a balance of £3750 and one at 24.9% with a balance of £750, and I had £1900 to pay off, I tell you rightaway I'd pay the lot off the one with the larger balance because the interest would be ridiculous.

...

But if you'd pay the £800... fair enough. lol. Many other people may agree, but everyone's different.

Everyone might be "different", but I can assure you that there is exactly one way to allocate payments that minimises the amount of interest you are charged in the long run.

And that way is to pay off the largest interest first. If you pay £1900 off a card at 24.9%, you're saving £473.10 interest a year (or £35.53 in that first month). If you pay £1900 off a card at 17.9%, you're saving £340.10 interest a year (£26.25 in the first month).

That puts you over £130 a year better off if you pay off the higher interest rate one first. I appreciate that people may have weird psychological boosts from doing things in a different order (such as completely clearing a small, low-interest balance) - but I expect if you lay it out in front of them, how much money they're losing by taking a sub-optimal order, they would be motivated to save that money.

(Whether the interest is "ridiculous" on a single card isn't important, it's the total that matters. It's better to have ridiculous interest on one card, than pay one-third of ridiculous amounts on four separate cards.)

dtsazza

lee1985 wrote: »

The lower the minimum, the less paid towards the debt and therefore the slower the debt will get paid off. Some minimum payments don't even cover the interest payments and therefore the debt goes up!

I believe there was a change in regulations recently which means that minimum payments must now cover all interest plus 1% of the outstanding principal - so at least the debts will come down over time (albeit very slowly).

AFAIK this applies retrospectively to existing credit card agreements, hence why a lot of cards changed their terms and conditions a couple of months ago.


Of course, this shouldn't make a difference to anyone sensible (in fact it might be a tiny disadvantage). Paying only the minimum payment off all cards isn't a great idea; and if you're unable to pay off the whole amount, you do want to focus all payments on one card and pay just the minimum on others. In that context the lower the minimum payment is the better.