A good plan to clear credit card debt?

Mahone1302

Forgive the lengthy post however I'm after some advice on how to get out of the situation I'm in; which is one of increasing my debts each month to get by.

The Background

I'm 29 years old and late last year came out of a 10 year relationship. I have three children from this relationship who I pay maintenance for at £301.73 per month. Things between myself and my ex are amicable at present and neither of us are trying to get money from one another. I work full time as a Police Officer and my current payscale puts me on £30,669 pa. This will increase annually, up to £37,254 (+ public sector payrises) by 2020. Due to the relationship breakdown I moved out of the family home and now live in a rented apartment that I pay £595 per month for. I have been here for 6 months and have recently renewed for a further 6 months.

I am named on the mortgage of the family home - however this is more a technicality and it now costs me nothing and I will come out of it with nothing. I'd prefer not to go in to the reasons why on here however, as I don't feel it to be relevant. My ultimate plan is of course to buy my own home. I hope to do this within 6 months although I suspect I may be looking at more like 12-18 months as I need to get my finances in order as well as have my name removed off the other mortgage.


The Problem

The issue currently is that having worked my budget out, I'm overspending each month by approx £150 per month. This is being funded by overtime at work and by credit card use, which is of course increasing my debt. I have cut back on almost everything:

Entertainment: I'm paying £13.75 per month (inc. line rental) for broadband and home phone from TalkTalk. I have no TV subscription and only watch Freeview and Netflix (£5.99 per month). I rarely watch Freeview so I am considering canceling my TV license. I pay £35 per month for a mobile phone contract.

Utilities: My water, gas and electricity comes to £60 monthly. I get a council tax reduction of 25% which means I pay £94 per month for 10 months of the year.

Child Maintenance: Due to working on a 10 day shift pattern (6 on 4 off) I have my children for 3 nights out of 10. I am aware that if I had 50% shared care I would not have to pay any maintenance however at present I simply couldn't go for 50% on my shift pattern, and to be fair my ex relies on my maintenance payments to get by, so I don't begrudge paying it.

Food: I estimate that I'm spending approx £200 per month on food. This includes food for my children when they are staying with me.

Car: I am 1 year in to a 5 year HP agreement. The cost of the vehicle was £9,525, I paid a cash deposit of £1,000 and px'd my old car for £1,500. The remainder, 7,025 (not inc. interest - £1,577), I borrowed from the finance company. APR is 8.7% and interest is 4.49% per annum. After one year I have £7,000 approx outstanding on the car and this is costing me £143 per month. There is no question here about the deal - I'm happy with the car I got the finance deal, however reducing this payment would of course be helpful. My children live 6 miles away and are schooled 7 miles away, and I'm often required to travel elsewhere for work. The car is also important for my personal life. I've considered returning the car and going for something cheap that I can buy outright, however I've had older cars in the past and had nothing but trouble and regularly costly repairs. I've also considered a cheaper car, however I'm currently driving a Ford Focus estate. I need something of this size at least due to the kids etc, and Ford are fairly cheap as cars go. Fuel is currently costing me £80 per month. My car is fuel efficient (approx 50mpg) however the school runs are costing me the most. I am trying to reduce my car usage for commuting, by cycling, however work is only 2 miles away anyway so it's not a huge saving.

Rent: £595 per month. I have considered somewhere cheaper however I have a very good deal where I am. I am paying this amount for a large 2 bed apartment in a nice area, when smaller apartments in similar areas cost a minimum of £650 per month. Properties in the lesser sought after areas are all council, and I'd be way down the priority list so I'm not even going to entertain the idea.

Credit Cards: This is what is hitting me the most. This month I paid out £429 in credit card repayments - minimum payments because I can't afford to pay more. This should be reducing each month but I'm stuck in that circle of using my credit card to fund my day to day costs, meaning it's actually increasing. This is the area that I've identified as being the one where I can make the biggest saving.

Salary: Despite my salary being relatively good, my take home is approx £1450 per month. On my last payslip my NI was £219, Tax £245, Student Loan £94, Pension £339. In addition to this I pay £21 for Police Federation membership, £21 for benefits scheme that includes £105,000 life insurance, £100,000 disablement cover, sick pay benefit (will top my salary up to full for 2 years if I'm off sick) critical illness cover, breakdown cover for me in any vehicle, family worldwide travel cover, and some other smaller things such as home emergency cover and legal expenses cover. I pay £6.32 for a 'Welfare' payment which means if ever I get injured at work I can go to an excellent treatment centre for several weeks to aid recovery. I also pay £24 for health care insurance although I am considering coming out of this. My pension costs me quite a sizeable sum and I am considering coming out of this temporarily for 3 years (I have checked, it is possible) to help clear my debts and assist me with a deposit for a house. My rationale is that my pension will be no good to me if I'm just spending it on rent, however if I come out of it now, sort my finances out and buy a house, then by the time I draw my pension I'll own my home outright, or near enough. In addition to this I still have 30 years service left which is plenty of time to hopefully top my pension back up to it's full amount!


The Solution?

My current amount of credit card debt is £13,000. This is spread over 4 credit cards and 2 store cards as below:

Next: £556.82 (29% ?) Most recent repayment: £29
Argos: £247.31 (19% ?) Most recent repayment: £7.49
MBNA: £677.71 (25.9%) Most recent repayment: £25
Barclaycard: £7391 (0% until July 2017) Most recent repayment: £184
Virgin: £2816 (0% until April 2017) Most recent repayment: £28
Halifax: £857.91 (0% until January 2017) Most recent repayment: £13

As can be seen there is a large proportion of this total debt that is currently on 0% deals - I've done some 'tarting' in the past that to be fair has saved me a significant amount of money in interest. These deals of course will not last forever. Most of this debt is made up of necessary costs, though I have spent on a few luxuries, but nothing major.

What I am currently looking in to is a loan to consolidate my debts and reduce my monthly payments so that I am no longer having to effectively spend on credit cards to cover credit card debts and the finance on my car. Having used 'credit matcher' tools it appears that due my credit history (Experian score me as 999/999) I have a good chance at securing a decent loan with low interest rates, primarily from Sainsburys Bank. I have considered the following options:

Pay off the interest incurring debt - £9000 approx. (currently £210 per month)

£9000 over 5 years from Sainsburys at 3.3% APR - £162 per month. This would reduce my spending on these debts by £48 per month. Total cost of credit for this loan would be £904. My eligibility apparently is 60%.
£9000 over 5 years from AA at 3.9% APR - £165 per month. This would reduce my spending on these debts by £45 per month. Total cost of credit for this loan would be £763. My eligibility apparently is 80%.
£9000 over 7 years from Sainsburys at 5.3% APR - £128 per month. This would reduce my spending on these debts by £82 per month. Total cost of credit for this loan would be £1,747. My eligibility apparently is 60%.
£9000 over 7 years from Tesco at 3.4% APR - £120 per month. This would reduce my spending on these debts by £90 per month. Total cost of credit for this loan would be £1,108. Unfortunately there is no eligiblity rating for this one.


Pay off my entire £20,000 debt (currently £429 per month)

£20000 over 5 years from AA at 5.9% APR - £384 per month. This would reduce my total monthly spending on debts by £45 per month. Total cost of credit for this loan would be £3,058. My eligibility apparently is 80%.
£20000 over 5 years from Sainsburys at 3.9% APR - £366 per month. This would reduce my total monthly spending on debts by £63 per month. Total cost of credit for this loan would be £2,008. My eligibility apparently is 60%.
£20000 over 7 years from AA at 5.9% APR - £289 per month. This would reduce my total monthly spending on debts by £140 per month. Total cost of credit for this loan would be £4,338. My eligibility apparently is 80%.
£20000 over 5 years from Sainsburys at 3.9% APR - £271 per month. This would reduce my total monthly spending on debts by £158 per month. Total cost of credit for this loan would be £2,833. My eligibility apparently is 60%.

There are other loan deals I've seen that are available to me however the above are a selection of the ones I'm most eligible for and the lowest interest rates.

Obviously there are some flaws in my calculations, in that a loan has a regular payment amount but my credit card payments (currently minimum payments) should in theory be reducing each month. However as previously stated they're not, because I can't afford it. In addition to this I understand that if I pay off the whole £20,000 then I'm going to be paying off interest free debt with a loan that is costing me interest, however the monthly payments will be more affordable. These savings coupled with the £300 or so I will save from coming out of the pension, are in the region of £350-450 per month, which will be make a huge difference to my finances and give me time to get things in order.

To those who have made it to the end of this lengthy and complicated post, my question is.. does taking out a loan to consolidate my credit card debt and car finance, thus reducing my monthly payments significantly, and giving me a set date of 5 or 7 years for clearing of my debts, seem like a good idea?

I see the pros as being a reduced monthly payment, a set date, finances all in one place and more manageable so that they aren't increasing each month when they should be reducing. I can't really see any drawbacks to this. Am I missing something? Other than me having to have some self control not to start using credit cards again.

Thanks for reading!

HappyMJ

Personally over the next 6 months I would pay off the Next, Argos and MBNA cards. I would then pay of the Halifax card which should be near enough to paid off by January 2017 and only in April 2017 would I consider refinancing to pay off the expiring 0% offer.

I would leave the car HP plan alone. If you were to lose your job through whatever reason you could stop paying that they can take the car or you can return the car and your credit is intact. If you refinance that into a loan now you lose that option....and anyway it's cheap enough.

Stay in the pension if you possibly can. It's a good deal. I personally don't like pensions but some pension plans are very good and you would be losing a significant amount of money by coming out.

Unfortunately with 3 children to support you will have an overspend each month. It might take a very long time of shifting debts about on 0% cards but eventually the child support payments will stop and you can start paying down the debts.

You will over the next few years get pay rises which will help as well so there is a chance you can get on top of this before too long.

I would not consider buying a property whilst being an owner of another property even if just in name you've got to pay an extra 3% SDLT which you can ill afford. You need to clear your debts and save a minimum 10% deposit to even consider buying so I'd just put that on the backburner for now.

Mahone1302

HappyMJ wrote: »

Personally over the next 6 months I would pay off the Next, Argos and MBNA cards. I would then pay of the Halifax card which should be near enough to paid off by January 2017 and only in April 2017 would I consider refinancing to pay off the expiring 0% offer.

The problem is that to afford to pay these cards off in the next 6 months (hence paying more than the minimum) I would need to reduce what I'm paying towards the others, which is already the minimum. I have no extra money to pay these cards off any quicker.

I would leave the car HP plan alone. If you were to lose your job through whatever reason you could stop paying that they can take the car or you can return the car and your credit is intact. If you refinance that into a loan now you lose that option....and anyway it's cheap enough.

Fair point though I'm not at much risk of losing my job thankfully. Police Officers can't be made redundant (yet) and I'm not in the habit of getting in to trouble at work. I feel that the pros far outweigh the cons here.

Stay in the pension if you possibly can. It's a good deal. I personally don't like pensions but some pension plans are very good and you would be losing a significant amount of money by coming out.

I'd only be taking a break from it for 3 years. The way I see things is that if I don't take this break then I'm only building this pension up to spend it on renting when I eventually draw it. On the other hand if I spend the next three years investing the money in to buying a property, then when I do come to draw my pension I will be able to spend it on living. I will rejoing it in 3 years time and from then on I have 27 years service left, during which I can work on topping it back up to what it should be.

Unfortunately with 3 children to support you will have an overspend each month. It might take a very long time of shifting debts about on 0% cards but eventually the child support payments will stop and you can start paying down the debts.

The children are aged 1, 5 and 7 so unfortunately for me it's going to be a very long time until the child support payments stop, well in to my 40's in fact..

You will over the next few years get pay rises which will help as well so there is a chance you can get on top of this before too long.

This is something I'm looking forward to and thanks to the new payscale structure my salary will increase by £7,000 over the next 3 years, and that's without looking at promotion.

I would not consider buying a property whilst being an owner of another property even if just in name you've got to pay an extra 3% SDLT which you can ill afford. You need to clear your debts and save a minimum 10% deposit to even consider buying so I'd just put that on the backburner for now.

We're in the process at present of removing my name from the house so I wouldn't consider buying one myself until this was done. The way things are I have no chance of saving a deposit which is why I want to reduce my monthly repayments and come out of the pension temporarily. Otherwise I won't be able to consider buying a house until I'm in my 40's.

I've been offered a £10,000 loan by my grandparents to use as a deposit. If I came out of the pension I could pay this back within 3-5 years, with the added advantage that if I get in to financial difficulties, they'd be more than happy for me to take as long a break as necessary from the repayments, whilst I got back on my feet. I've considered asking to borrow the money for the purposes of paying off the debts however I wouldn't feel comfortable doing this and I'm not sure whether they'd be happy with it either. If I borrow money off my relatives then it's for investing in my future.

HappyMJ

Mahone1302 wrote: »

The problem is that to afford to pay these cards off in the next 6 months (hence paying more than the minimum) I would need to reduce what I'm paying towards the others, which is already the minimum. I have no extra money to pay these cards off any quicker.



Fair point though I'm not at much risk of losing my job thankfully. Police Officers can't be made redundant (yet) and I'm not in the habit of getting in to trouble at work. I feel that the pros far outweigh the cons here.



I'd only be taking a break from it for 3 years. The way I see things is that if I don't take this break then I'm only building this pension up to spend it on renting when I eventually draw it. On the other hand if I spend the next three years investing the money in to buying a property, then when I do come to draw my pension I will be able to spend it on living. I will rejoing it in 3 years time and from then on I have 27 years service left, during which I can work on topping it back up to what it should be.



The children are aged 1, 5 and 7 so unfortunately for me it's going to be a very long time until the child support payments stop, well in to my 40's in fact..



This is something I'm looking forward to and thanks to the new payscale structure my salary will increase by £7,000 over the next 3 years, and that's without looking at promotion.



We're in the process at present of removing my name from the house so I wouldn't consider buying one myself until this was done. The way things are I have no chance of saving a deposit which is why I want to reduce my monthly repayments and come out of the pension temporarily. Otherwise I won't be able to consider buying a house until I'm in my 40's.

I've been offered a £10,000 loan by my grandparents to use as a deposit. If I came out of the pension I could pay this back within 3-5 years, with the added advantage that if I get in to financial difficulties, they'd be more than happy for me to take as long a break as necessary from the repayments, whilst I got back on my feet. I've considered asking to borrow the money for the purposes of paying off the debts however I wouldn't feel comfortable doing this and I'm not sure whether they'd be happy with it either. If I borrow money off my relatives then it's for investing in my future.

Why the need to buy? Property ownership does cost money and it's not that much less than renting. I both own a property and rent a flat...I hardly make anything renting my house out and it's not worth buying the flat as the rent is almost the same as a mortgage plus service charges and maintenance. You're also tied to the property and moving is much more difficult.

You are not going to be able to borrow any large sums of money whilst having so much debt outstanding. Being able to get a small 0% on balance transfers credit card may be possible but getting a £20,000 loan is going to be virtually impossible whilst having £21,000 of outstanding debt. Even getting just a £9,000 loan is going to be very difficult. You would owe £30,000 for a short period of time and no lender is going to take that risk on your level of income.

Although it states your chances of acceptance is 60% that may as well be zero.

Try going through the whole loan application with Sainsbury's and see what rate is actually offered. You do not have to take up the loan if the offer is more than 5.9%. Anything more than 5.9% and it's pointless. Even at 5.9% and it's not really worth it. The interest on the car loan is 4.5%. You're looking to save money so you need the 3.9% rate and even then that won't save much at all.

Stopping pension contributions will cost you much more in the long run. Your pension is protected from any bankruptcy that you may end up in and as you have an unavoidable overspend now and that may happen some time in the future.

If you took out a personal loan I feel an eventual bankruptcy would be inevitable.

I would be protecting your future as much as possible keeping up the pension contributions. When you claim your pension you can get 25% tax free and can buy a house for cash.

indesisiv

Even if you got the loan to pay off your credit cards would you not still be struggling on affordability for the mortgage application?
You would be applying with 3 dependants, monthly loan, CSA, car payment commitments ... I would guess you could only borrow in the region of 40-50k max with all of those.

Mahone1302

indesisiv wrote: »

Even if you got the loan to pay off your credit cards would you not still be struggling on affordability for the mortgage application?
You would be applying with 3 dependants, monthly loan, CSA, car payment commitments ... I would guess you could only borrow in the region of 40-50k max with all of those.

Potentially, but that'd be a bridge I'd have to cross when I get there. A mortgage for the size of house I need would cost me less per month than I'm currently paying in rent however. By the time I apply for a mortgage (realistically no sooner than the end of 2017) my salary will have increased to £33,000 potentially £34,000, take home being about £1,700, potentially £2,000 if I wasn't paying in to a pension. If I was to go for the loan then I'd hope my debt had reduced down to around £16,000, costing me approx £300 per month in total. With bills at £200, food at £200, child maintenance at £300 this would leave me between £700-£1000 per month for rent/mortgage and other costs. I'd hope this would go in my favour and I'd be able to demonstrate to a mortgage provider that I'd manage to take control of my finances and that I was making a good effort to become debt free (bar the mortgage of course).

There is also a further consideration here being that I'm now in new relationship which is going very well. There is the possibility that when I do look to buy a property, I won't be doing so on my own. It's too soon to tell at the moment and it's not particularly a factor in where the relationship goes, but something that is sensible to be aware of and consider.

vampirotoothus

If I was you I would come of the pension for 6 months and clear the 3 interest bearing accounts, highest APR first. I would also increase the payments on the other accounts by a couple of pounds so that you are paying more than the minimums as that looks better to lenders. When you have paid MBNA I would consider moving some of the Barclaycard debt to it, if tMBNA will give you 0%. Whilst you will pay a transfer fee it will save you money monthly for the same debt as for Barclaycard you pay 2.25% of the remaining balance and all the others are 1%. So that would help your cash flow.

Mahone1302

vampirotoothus wrote: »

If I was you I would come of the pension for 6 months and clear the 3 interest bearing accounts, highest APR first. I would also increase the payments on the other accounts by a couple of pounds so that you are paying more than the minimums as that looks better to lenders. When you have paid MBNA I would consider moving some of the Barclaycard debt to it, if tMBNA will give you 0%. Whilst you will pay a transfer fee it will save you money monthly for the same debt as for Barclaycard you pay 2.25% of the remaining balance and all the others are 1%. So that would help your cash flow.

Not sure if I'm misunderstanding you or you've misunderstood me, but my Barclaycard balance is entirely at 0% interest. In addition to this Virgin are currently offering me a balance transfer of up to £3388, either at 0% until June 2017 with a 2% fee, or 0% until February 2018 with a 4% fee. Would this be a better option to clear the interest bearing accounts; approx £1500? This would obviously incur the fee, either £30 or £60, but I'd save that within the first couple of months compared to what I'd be paying in interest if I didn't transfer. From that point on my only interest bearing account (until one of the 0%'s finish) would be the car finance.

HappyMJ

Mahone1302 wrote: »

Not sure if I'm misunderstanding you or you've misunderstood me, but my Barclaycard balance is entirely at 0% interest. In addition to this Virgin are currently offering me a balance transfer of up to £3388, either at 0% until June 2017 with a 2% fee, or 0% until February 2018 with a 4% fee. Would this be a better option to clear the interest bearing accounts; approx £1500? This would obviously incur the fee, either £30 or £60, but I'd save that within the first couple of months compared to what I'd be paying in interest if I didn't transfer. From that point on my only interest bearing account (until one of the 0%'s finish) would be the car finance.

Thye may have got the name mixed up...don't worry about it pay the card off with the highest interest rate first.

That would be a much better offer...as long as you close down the accounts charging 19%+ interest and do not use them again.

I'd go with the 4% fee and the longer term.

I would keep the excess as cash (in a high interest current account) to use to make the minimum repayments on the 0% debts and to meet any emergency expenses over the next 6 months and when the offers expire if you aren't able to get another 0% offer I'd pay them off with the left over savings.

I would not pay the car finance off any quicker than you have to. You've got the option of returning the car if you need to. You don't want to be paying extra off and not being able to get that back.

kindofagilr

HappyMJ wrote: »

You are not going to be able to borrow any large sums of money whilst having so much debt outstanding. Being able to get a small 0% on balance transfers credit card may be possible but getting a £20,000 loan is going to be virtually impossible whilst having £21,000 of outstanding debt. Even getting just a £9,000 loan is going to be very difficult. You would owe £30,000 for a short period of time and no lender is going to take that risk on your level of income.

Although it states your chances of acceptance is 60% that may as well be zero.

I have found this not to be the case for us, our combined income is £33k, we have £34k on cards and we have empty cards with limits of £15k, so total in credit reports available is £49k which is more than we earn?

My own wage is £12k and H@BC gave me a £5000 0% credit card for 30 months

Mahone1302

HappyMJ wrote: »

Why the need to buy? Property ownership does cost money and it's not that much less than renting. I both own a property and rent a flat...I hardly make anything renting my house out and it's not worth buying the flat as the rent is almost the same as a mortgage plus service charges and maintenance. You're also tied to the property and moving is much more difficult.

I'm not sure why the rush to be honest, I just feel it's the best investment to be making. I've never been a fan of renting.

You are not going to be able to borrow any large sums of money whilst having so much debt outstanding. Being able to get a small 0% on balance transfers credit card may be possible but getting a £20,000 loan is going to be virtually impossible whilst having £21,000 of outstanding debt. Even getting just a £9,000 loan is going to be very difficult. You would owe £30,000 for a short period of time and no lender is going to take that risk on your level of income.

Although it states your chances of acceptance is 60% that may as well be zero.

Thanks - I hadn't considered this.

Try going through the whole loan application with Sainsbury's and see what rate is actually offered. You do not have to take up the loan if the offer is more than 5.9%. Anything more than 5.9% and it's pointless. Even at 5.9% and it's not really worth it. The interest on the car loan is 4.5%. You're looking to save money so you need the 3.9% rate and even then that won't save much at all.

I'll keep this in mind.

Stopping pension contributions will cost you much more in the long run. Your pension is protected from any bankruptcy that you may end up in and as you have an unavoidable overspend now and that may happen some time in the future.

If you took out a personal loan I feel an eventual bankruptcy would be inevitable.

I'm not sure I understand this - am I missing something? If I was to take out a loan for £20,000 (if possible) to pay off £20,000 worth of debt, with repayments that are cheaper than at present, and with a set period of 5/7 years to repay, where is the risk? My issue appears to be that whilst my credit card payments should be reducing, they're not, because they're so high that I can't afford them and I'm using credit cards to keep afloat because of my cashflow problem. This is the circle that I need to get out of.

I would be protecting your future as much as possible keeping up the pension contributions. When you claim your pension you can get 25% tax free and can buy a house for cash.

But then would I not be better off now if I could spend the £595 per month I'm spending on rent, on a mortgage instead?