Getting on my feet

[Deleted User]

Hi Everyone
After a pretty trying year last year (moving twice and losing my job), I'm now in a permanent job, earning £35k, and things finally seem stable.

I have 2 main sources of debt - about £1500 on a credit card, and an overdraft of £2700 in a bank account that I don't use. I want to be able to clear this debt but also need to be realistic - it's not going to happen overnight and could well take 2 or 3 years.

I've drawn up a monthly budget including a contingency. I have £600 left per month after all bills and spending.

What is the best approach to take for clearing debt? I was thinking of setting aside a fixed amount per month to pay it off, starting with the credit card. Or, would it be better to pay both at the same time? Also, and I know this advice is generally frowned upon because debt costs more than savings earn, but I REALLY want to build up a cushion of £1000 before I start paying my debt off. My family live in Tennessee and I sometimes find myself having to go back when I hadn't planned to. For example, in January I had to go back, and I had just paid off half my credit card (£1000) and before I knew it, it was used up again. It would be great to know I had another source of funds I could dip into without derailing my debt payment plan.

Is there anything anyone would do to improve this plaN?

mgdavid

Well done for getting back on track :beer:
Even with only £500 spare each month you should be able to clear debts within a year :-)
If it were me, I'd pay each month:
200 to the CC
150 to the OD
remainder to a high interest current account.
After 8 months when the CC is clear then re-balance, maybe half and half OD and savings.

LXdaddy

Thankfully I've not been in this situation but... isn't the guidance to pay off the debt with the highest interest rate first (or at least quickest)


At the very least I'd want to pay the monthly interest on each account so it doesn't get bigger then look at where to put any more I have available to make the biggest impact.

Candyapple

Enter your debts in the calc below and it will tell you how much and in what order to pay first and how long it will take to clear:
http://www.whatsthecost.com/snowball.aspx

Anthorn

Going back to 2007/8 when I found myself a financial untouchable at the age of 57 I submitted my incoming and outgoing budget to just about anyone and everyone and set a monthly amount I could afford and stuck to it. The end result now is that every penny in every debt has been paid and my credit history is fully repaired. Overall, I set myself goals to aim for.

Khrisjun

Hi,

Its great that your a little more stable now - I think you should advise the current charges associated to the credit card and the overdraft before advise can be given over which to pay off. E.g. the Credit card could be a 0% purchase card costing you no interest and the overdraft could be an arranged overdraft with a minimal daily fee - or the credit card could be 40% interest and the overdraft an unarranged £12 a day fee...

Going by the most likely option of a 'normal' credit card and arranged overdraft i would be looking to get a 0% balance transfer credit card and transferring the credit card debt - ensuring at leas tthe minimum payment is made each month and then getting the overdraft cleared.

If you do have the requirement to go abroad at short notice etc, then this could always be Temporarily put back on the credit card - your unlikely to get a better savings rate than your current credit card rate.

KJ

eskbanker

While I agree with the principle of paying off the most expensive debt first (i.e. the one with highest APR), I'd also recommend you consider the fact that overdrafts can be withdrawn on demand whereas credit cards can't. If you're not using the bank account that's overdrawn then the risk of it being withdrawn must be higher, i.e. if the bank doesn't see any evidence of the account being funded regularly.

Also worth factoring in what the facility limits are on both, i.e. how much headroom you have....

Flobberchops

I believe the optimum strategy (which IIRC I read on this site) is to just pay off your debts as aggressively as possible without worrying about keeping an emergency fund. The logic behind this is that if you don't need emergency cash your money will be better off clearing debt, and if you *do* need emergency money then you can simply dip back into the credit card or overdraft. Better for your new income to be "working" on eliminating debt than sitting "dead" in a very low interest instant access account.

mgdavid

I don't call 5% 'very low' - how do you define it?

ThePants999

I couldn't agree more with Flobberchops. If you're earning less interest on deposits than you're paying on debts, and you're able to get further funds from your debt instruments if you need it, then you're just losing money by building an emergency fund. Reach the point first where you have no expensive debts.