what should i pay off first?

kelwal75

Hi All

One of my resolutions for this year was to get in the black and thanks to a successful PPI claim i have recieved a lovely cheque this week, which will may my resolution so much easier to achieve.

My question is what should i pay off first?

I have an overdraft of apporox 2k this is an authorised overdraft and i pay a max of £1 per day each month for using in so worst case £31 per month.

I also have 2 credit cards one has a balance of approx £4,800 and the other £3,800.

Thanks to my claim i can either clear off my whole overdraft or pay a lump off one of the credit cards and work to pay one of them off then the second. It would mean living in my overdraft for approximatly 1 year but at the end of the year both my credit cards will be nearly paid off and the only loan i have will be paid off in August. Leaving me with only my mortgage going into next year

I;m not sure of my interest rates on my cards but i pay between £50-60 per card each month in interest, so by my calculations i would be better off paying these first?

Thanks

Willing2Learn

The most effective solution is to pay the debts in order of interest rates (not balances) as this saves you the maximum during the repayments. You focus on the highest interest first.

Taking this one stage further, to realise the full benefit of paying down the highest interest debt first you apply the 'snowball' method.

To snowball, you calculate what surplus money you will have available from your monthly budget and pay the minimum repayments on the lowest APR debts with all the rest going to the highest APR. Once the highest interest debt is clear you then move on to the next highest APR debt whilst maintaining minimum repayments on the remaining debts and so and so on....

unimaginative_user_name

I agree with Willing2Learn about snowballing. The only other thing to bear in mind is that banks can ask you to pay off your overdraft whenever they like so you might want to clear this first or make substantial inroads to it, and then concentrate on your credit cards.

DD265

http://makesenseofcards.com/snowcalc.html

Is a snowballing calculator. It's interesting and motivating to play around with different options - for example I considered the difference between paying off £400 and £500 per month, and I could see the difference it made to my debt free date.

You will need to find the interest rates for your cards though - I think it should say on your monthly statement?

kelwal75

Thanks for the replies, sounds like a plan, i will take a look at the calculator, I've had the overdraft a while and i do pay it off when i get paid, but end up going back into it, so hopefully because i have a regular income they won;t ask for it all back straigh away and if they do i'll just have to change tactics

Willing2Learn

Just to add, don't know what your credit file looks like or how good your are at managing your budget. But to speed up the repayments and reduce interest paid you could consider

• Paying the overdraft in full
• Applying for 0% card and transfer existing cc debt onto them (incurs a fee)
• Make the deposits you would have made as repayments (via snowballing) into a regular saver account that earns 4-6% interest.
• Don't make any new purchases on the 0% card as you'll end up paying interest.
• Use the old cards for all new purchases and pay their statements in full each month so you don't pay interest with them either (Could look for a cashback card so that you earn money from them??).
• Don't spend the savings as they will be used to repay the balance on the card when the 0% period ends.
• Interest received from savings account means cc issuer is effectively paying you to pay down the debt.

WARNING: You must be disciplined to do this and if you don't feel that you are able to budget this way then disregard. Don't get yourself into trouble.

kelwal75

I've dug out my statements and had a go on the snowball calculator and have a clearer idea of what will work best for me.

Thanks for the idea of the 0% card, i might consider it, although i'm not convinced i'll be disiplined enough so may give it a miss otherwise i could be back in a few months trying to pay off an extra card lol.