What should I pay first?

windup

bigadaj wrote: »

Now what would you do with your spare £300.

.

The choice of 300 seems to be mixing up 2 concepts

there is the concept of what to do with some spare cash, and the secondary concept of what to do with spare cash which comes available for a few weeks as a result of clearing the cheaper card, and using it for general interest free spending on groceries and the like

if you use that 300 to chip away at the higher debt after paying off the cheaper card completely, then where does the money come from when the first cards full balance becomes due 3 weeks later. it would take a fair amount of discipline and timing to make this interest free loan work effectively

you won't find a current account paying anywhere near the 25% differential, so the answer is the same, highest apr first, always (situations involving 0% balance transfer deals might muddy the waters somewhat)

people in debt often feel better if they clear one debt completely, but emotion shouldn't be involved in a purely mathematical decision if the aim is to become debt free in the shortest possible time

Anthorn

redpete wrote: »

In the OP's case they have an extra amount of cash to pay off more than the minimum amount, so keeping the monthly outgoing as low as possible is not a priority.

Well I gave you a thanks because your wrong-headed logic gives others the opportunity to point out the error so that others might not be equally confused.

One way your scheme could make sense is if you are really up against it and have to keep monthly cash-flow as low as possible and the minimum monthly payment on two cards is higher than the minimum monthly payment on the same total amount but on one card. Another is if one of the cards is close to the end of a low interest period and it will shortly be rising to a much higher level - in this case it could be worth paying off the card with the soon-to-be disappearing low interest rate.

In the more normal case when people are interested in paying the least amount of interest in total over the life of the debt then your scheme makes no sense.

Let's simplify it: I'm paying a monthly payment of £50 on card A and £50 on Card B. So my monthly liability is £100. But if I clear card A then my monthly liability has halved and is now £50.

As I suggested in my original post in this thread we need to calculate making a a payment off the card with the highest APR against clearing a card to see what savings can be had and which applies.

Saying that we just make the payment off the card with the highest APR without calculating the saving against different outcomes doesn't cut it. It's not as simple as that. It may well be that we can get the highest saving from reducing the balance of the card with the highest interest but maybe not. We don't know until we calculate it.

windup

why is it not as simple as that

£50 at 24.9% costs (£6.50) 13% more pa than £50 at 11.9%
£50 at 24.9% costs (£0.50) 1% more pa than £50 at 23.9%

CLAPTON

Anthorn wrote: »

Let's simplify it: I'm paying a monthly payment of £50 on card A and £50 on Card B. So my monthly liability is £100. But if I clear card A then my monthly liability has halved and is now £50.

As I suggested in my original post in this thread we need to calculate making a a payment off the card with the highest APR against clearing a card to see what savings can be had and which applies.

Saying that we just make the payment off the card with the highest APR without calculating the saving against different outcomes doesn't cut it. It's not as simple as that. It may well be that we can get the highest saving from reducing the balance of the card with the highest interest but maybe not. We don't know until we calculate it.

lets pose an example

suppose we have two CCs
A with a balance of 500 and an APR of 5%
B with a balance of 2000 and an APR of 30%

for ease of calculation lets suppose neither have a minimum payment

further suppose we have £100 per month to pay back in total

what is the quickest strategy for clearing both debts?

bigadaj

windup wrote: »

The choice of 300 seems to be mixing up 2 concepts

there is the concept of what to do with some spare cash, and the secondary concept of what to do with spare cash which comes available for a few weeks as a result of clearing the cheaper card, and using it for general interest free spending on groceries and the like

if you use that 300 to chip away at the higher debt after paying off the cheaper card completely, then where does the money come from when the first cards full balance becomes due 3 weeks later. it would take a fair amount of discipline and timing to make this interest free loan work effectively

you won't find a current account paying anywhere near the 25% differential, so the answer is the same, highest apr first, always (situations involving 0% balance transfer deals might muddy the waters somewhat)

people in debt often feel better if they clear one debt completely, but emotion shouldn't be involved in a purely mathematical decision if the aim is to become debt free in the shortest possible time

I'm certainly not confusing this, look back at the OP and this states a one off bonus payment, you seem to be conflating things unnecessarily. The differential you quote is irrelevant, it's a one off payment which you pay against the highest rate debt to gain the maximum reduction in interest.

bigadaj

Anthorn wrote: »

Let's simplify it: I'm paying a monthly payment of £50 on card A and £50 on Card B. So my monthly liability is £100. But if I clear card A then my monthly liability has halved and is now £50.

As I suggested in my original post in this thread we need to calculate making a a payment off the card with the highest APR against clearing a card to see what savings can be had and which applies.

Saying that we just make the payment off the card with the highest APR without calculating the saving against different outcomes doesn't cut it. It's not as simple as that. It may well be that we can get the highest saving from reducing the balance of the card with the highest interest but maybe not. We don't know until we calculate it.

No you are wrong as many people have pointed out already. There is no way that a marginal benefit in cash flow from gaining back the interest free period will make anywhere near the impact that a lump sum paid off a high rate card. This assumes the initial post that it is a one off benefit and otherwise the minimum payments plus a moderate repayment is always being met by the cardholder.

The only scenario where paying off a card in this way could be useful is if this triggers a 0% offer for a substantial amount from the cleared card provider, however this wouldn't be known before the payment and would be a high risk strategy with no guarantee.

windup

bigadaj wrote: »

I'm certainly not confusing this, look back at the OP and this states a one off bonus payment, you seem to be conflating things unnecessarily. The differential you quote is irrelevant, it's a one off payment which you pay against the highest rate debt to gain the maximum reduction in interest.

you are, the op doesn't mention 300, unless they are an alter ego, they are long gone, others have picked up the baton and widened the question

I'm not conflating anything, many people are chipping in scenario's, if you read them in the order they are posted, it will explain why there are 2 issues in play. after quoting my post, you asked what would I do with the 300, the figure I used as a monthly grocery estimate for ongoing spending, not the lump sum figure.

if you are talking basic maths, choosing 5% and 25% is no different to choosing 1% and 1200% in principle, so it's not adding anything to the discussion, the answer is the same, it's cheaper to pay off the higher apr debt first.

the 'irrelevant' differential would be relevant, if there was a savings/current account that had a higher aer than the debts apr, but there isn't, so what was all this about

bigadaj wrote: »

Now what would you do with your spare £300.

Also whilst the money may be sat in a current account for a month then assuming it's one paying a decent rate, far in excess of any available savings account, then that could easily be paying at or close to the interest on the lower rate card.

There is no way that a marginal benefit in cash flow from gaining back the interest free period will make anywhere near the impact that a lump sum paid off a high rate card

there is, you could organise purchases so that you get a continual monthly loan for nothing, and use that to reduce the balance on the higher rate credit card, but it takes discipline, and assumes one is cleared completely

bigadaj

windup wrote: »

you are, the op doesn't mention 300, unless they are an alter ego, they are long gone, others have picked up the baton and widened the question

I'm not conflating anything, many people are chipping in scenario's, if you read them in the order they are posted, it will explain why there are 2 issues in play. after quoting my post, you asked what would I do with the 300, the figure I used as a monthly grocery estimate for ongoing spending, not the lump sum figure.

if you are talking basic maths, choosing 5% and 25% is no different to choosing 1% and 1200% in principle, so it's not adding anything to the discussion, the answer is the same, it's cheaper to pay off the higher apr debt first.

the 'irrelevant' differential would be relevant, if there was a savings/current account that had a higher aer than the debts apr, but there isn't, so what was all this about

I'll leave this to you and your appropriate username.

You have used the same amount of hypothetical extraction differently and come up with a mildly different scenario, which again is unlikely to be real world.

If you have a one off bonus and a choice of debt to pay down then for the vast majority of people paying down the highest interest card is the best thing they can do.