Pay them off or 0% balance transfer?

Dodger

I am in the very fortunate position of receiving enough money to pay off my existing credit cards. Question is, do I just take the simple route and use my windfall to pay them all off or transfer the balances to a 0% card and pay the debt off over a period of time?

Can't help thinking that the money is better off in my account and is there for use on my terms whilst paying off the combined balances on a 0% deal.

What would you do?

Cycrow

It would depend on what balance transfer deal you can get, and how disciplined you are.

The ideal way, would be to transfer the debt for a long period at 0%, and put the money into a savings account earning interest, paying off just the minimum each month. Then at the end of the period, paying of the remaining balance from you savings.

however, if you are not that disciplined, you may end up just spending the money instead of saving it, therefore not earning any interest and not having the money to pay it off at the end of the term.

if you think that may happen, then you could work out how much you need to pay a month so the balance is cleared by the end of the term, and setup a direct debit to pay that amount. This way its more like a loan, and you wont have a large amount to pay at the end, but you also wont get as much interest.

paying it off now is obviously the safest method, but you sacrifice any extra interest you would have earned

chattychappy

What interest can you get and will you pay tax on it?

The maths can be a bit complicated, but let's say you get a 12 month 3% fee BT deal. You might think that you would only need to exceed 3% AER to be quids in. But unless you are on gross interest or can claim the tax back, you would have to earn 3% NET interest (ie 3.75% GROSS). If you're a higher rate tax payer then you need even more.

Next point is that you have to start paying back the BT right away. So you are paying a 3% fee on the WHOLE balance when in fact you won't be borrowing the whole amount for the whole period. Say the minimum repayment is 3% of the balance. Then by the end of the year you would have paid roughly 30% of the balance back. Your average balance would be roughly 83% of the opening balance. So your 3% BT fee looks a bit more like 3.6% for comparison purposes.

Of course you can get BTs for longer periods than 12 months and with lower repayment requirements. For example, for an 18 month, 3% fee, 3% monthly repayment I reckon you'd need to NET at least 2.6% to be quids in by saving. Not easy!

But also just one repayment blunder and you lose the deal.

Unless you can get a very long period with a very low repayment requirement, I'd pay the debt down. If you do need to borrow again, then get a 0% purchases card.