What should I pay first?

HitTheBeach

Hi all,

I want to become completely debt free as soon as possible. The problem is I don't know which of my debts to pay off first so as to achieve my target in the quickest time.

Would I be better to pay off the smallest amount first and then when that is paid, use the money I would normally use to pay of that debt to then overpay onto the next smallest debt or would I be better to pay off the debt with the highest interest first?

Many thanks in advance for any hints and tips.

HTB

Niv

The blanket response is, pay the debt that has the highest interest rate first.

Depending on your situation/personality that may not be 'best' for you. For instance if paying off a small loan so the number of debts reduces makes you happier, more confidant, up beat about paying off your debts, this may be more suitable.

If you do a SOA it will help others go into more detail with your personal situation.

HappyMJ

Highest interest rate first. Do you want to list them all for advice? The balances and interest rates and the minimum monthly payment and the expiry dates of any special offers will be fine.

Tixy

Paying the highest APR debt will mean you pay the least amount in interst.

Use the snowball calculator here and it will show you how much you can save compared to paying in ascending balance order - http://www.whatsthecost.com/snowball.aspx

(its also a good tool for seeing how much difference throwing an extra few quid a month to your debts can make).

The snowball will take into account any promo periods you might have on credit cards.
It cannot take into account other factors - such as if you pay off a small balance credit card with that provider then offer you a promotional balance transfer to move a higher rate debt to.

[Deleted User]

As stated by previous posters the quickest way to become debt-free is to pay the minimum payment towards all debts and overpay on the debt that is costing you the most [highest APR/interest rate].

Once the first debt is cleared snowball the next highest charging debt. IE, continue to pay the minimum towards all debts, then overpay the next highest charging debt with any surplus you have + the previous minimum payment to the paid debt

HTH

D9

HitTheBeach

I really appreciate all of your responses. Many thanks!

I will complete an SOA over the weekend but in the meantime, can I ask...

Would I be better to put money into a savings account each month until I have the lump sum to clear the highest interest debt or would I be better paying that money directly off the debt as an overpayment each month?

These are my debts.

HSBC Loan £1436.85 - 12.9%
HSBC Credit Card £4453.80 - 18.32%
Barclay Card £3910.53 - 24.9%

I guess the first one I should start with is the Barclaycard?

Thanks again!

Lomast

Pay the balance off directly each month, you would make MUCH less in interest in a savings account than you will be losing on the cards.

ie your lowest apr is 12.9% but you will struggle to get more than 3% interest in a savings account

HitTheBeach

Cheers.

Should I try to consolidate both Credit Cards onto a new credit card with a lower percentage?

DVardysShadow

In general, the rule is pay off the highest APR debt first. But there are exceptions if the monthly budget is tight with only a small surplus available for paying down debt.

If higher APR debts are actually loans with fixed monthly repayments but there is a small low APR debt which could be paid off quickly, thus adding its minimum payment back into the monthly budget, it may be preferable to pay off the small debt to create a little more slack

If there is a loan with very few monthly payments left which could be paid off several months earlier, this too could be paid off first to create more financial slack.

But once the slack is created, the only sane thing to do is to pay debt down highest APR first.

DVardysShadow

HitTheBeach wrote: »

Cheers.

Should I try to consolidate both Credit Cards onto a new credit card with a lower percentage?

If you can get a new credit card with a lower APR and you can trust yourself not to abuse it, then take it. And shuffle your debt onto that card by using it for your normal day to day purchases [don't make extra purchases for the sake of shuffling!!!!]. Instead of paying off the new card, pay the cost of the purchases off the highest APR card.

HitTheBeach

So, I have just been refused a balance transfer from Natwest and my Mrs was refused from HSBC which means we have to pay off the credit cards as they are with the high interest rate.

I have just set up a payment plan to pay £388 per month off the Barclaycard instead of the minimum payment of, currently £88. The increase of £300 per month should see that card paid off by MAY 2013 (The loan will be paid off by then too).

I can then start pumping the £388 from the Barclaycard and the £159 from the Loan into the HSBC Credit Card.

I think I can become debt free by October 2013.
I will then start on the mortgage.

1 Question
I still have available credit of £2546.20 on my HSBC card. With the interest being 18.32% compared to the 24.9% on the barclaycard, would it make any sense for me to pay off £2546.20 of the barclaycard using the HSBC card?