What to pay off first?...

larryuk

Hi all,

Just a bit of background. (Hope this is the right place to post).

I'm on the road to trying to clear off my debts. I have a 3-5 year goal of moving from our current 2 bed house to a 3 bed house and want to give myself the best chance of achieving this.

My debts
I have one credit card with £12k owing on it. This is at 6.9% until paid off and my minimum payment is approx £90.

I have a 5 year loan, (just taken out) of £14K. This was to pay off other credit cards. The interest rate on this is not great as it's 14%. But I wanted my cards consolidated and to make sure it's being chipped away at each month. Monthly payments are £320.

My mortgage is interest only, and I have £164K owing. This is made up of £156K of the mortgage, and a £8K loan. (This was a kind of 100% mortgage at the time we took it out).

I can cover all my monthly outgoings, mortgage/loan/cards/bills/food etc and have approx £200 a month spare.

A plan
So I have just taken on some extra work which should allow me to earn approx £800 a month extra, and I want to put this £800 towards my debts.

I'm just not sure what would be best. Obviously the loan is the highest interest rate so I'm guessing that would be the best. I can overpay without penalty and it'll reduce the term and therefore the interest.

My other options would be to clear the credit card. (Something that I am very keen to do) or pay off the "loan" part of the mortgage in order to improve the equity in our house.

Just wondering what peoples suggestions would be?

Thanks!

jodles16

Hello!

I would say pay off the most expensive first as that will help you more in the long run!

Good luck!

Tryingtomoveout

Pay off the highest rate interest first....sounds like your loan.

Having said that, if it was me I would probably feel like clearing the cc first as that seems more like 'debt' but I know that's silly.

Good luck

judi24

I would agree Tryingtomoveout - although my head says pay the loan first another part of me agrees that there a psychological element to CC debt that means I would want it gone!!!

larryuk

A plus side of clearing the cc first is that my total of credit utilised will go down, however by clearing it, I'm only freeing up about £100 a month vs £320 a month if I clear the loan.

judi24

I guess you need to weigh up whether clearing the CC and GETTING RID OF IT will make it less likely for you to be tempted to spend again on it or not? If you have self discipline you would be best to pay down the loan first and keep the cc with minimum payments but the temptation would be to spend again on cc while you pay off loan!


I guess only you can decide! But i know that with my Tesco CC i would pay a chunk off then spend a bit then pay a bit bit didnt really pay it off!

suse*

There are normally two ways this can work, the best way for your money or the best way for you.

Now the best way for your money is as others have mentioned to pay off the one with the highest rates first. If you have a play with this debt snowball calculator you can see the difference it will make paying it off this way.

http://www.whatsthecost.com/snowball.aspx

The second way though is more how you emotionally react to it, as it might not be the cheapest way, but sometimes paying the smaller debts first makes you "feel better" that you're getting somewhere, even though it is actually costing you a bit more in the long run.

So have a play with the debt snowball calculator and see if head can win over heart or not then you'll have your answer. Also post an soa as people can help find areas you can spend what money you have in a better way to help pay the debt off faster.