Should I pay off credit cards in this situation?

danlightbulb

Hi all.

I am saving for a house deposit but at the same time I have credit card debt. It will take me another 2 years to have enough for a house deposit and so far I have always managed to do balance transfers on my debt to keep it at 0%.

Before Christmas I paid off one of my cards at £2k. But then I found myself potentially having to leave my rental place because the landlord was struggling to remortgage. It turned out ok in the end but it made me think whether paying off these cards in bulk was a good idea. £7k is a 5% deposit on a £140k house, but because I'd paid off a £2k lump sum I only had £5k cash, which was only a £100k house at 5%. A big difference there. My 2 year target was to have enough for a 10% deposit so around £13k - £14k.

I have £8k of credit card debt.

Balance transfer period are ending for me in April. Do I clear what I can or do I do more 0% transfers and keep my cash?

jennyjj

danlightbulb wrote: »

Hi all.

I am saving for a house deposit but at the same time I have credit card debt.

£7k is a 5% deposit on a £140k house, but because I'd paid off a £2k lump sum I only had £5k cash, I have £8k of credit card debt.

Balance transfer period are ending for me in April. Do I clear what I can or do I do more 0% transfers and keep my cash?

I think the problem here is that you are treating the cash to hand that came from your 0% transfers as if it were your own actual cash and an asset to use as a deposit. It isn't, because it is matched by a liability on those debts. I suggest you change that mindset.

The cash is liquidity, which is good and which you have found might be needed in a hurry, I'll grant you that.

When stoozing with balance transfers, the simple rule of thumb has to be 'am I getting, or can I get, returns on the borrowed cash that are greater than its cost to me'. E.g. if you have 0% debt that is invested in Ratesetter ( for example) and returning 3%, then it's a no brainer to get and keep every ounce of that debt as long as possible. Similarly if you have 0% debt and a 5% mortgage, you'd be daft to pay the 0% debt back early. But if the borrowed cash is just sat around doing nothing. . . well, don't let it: Don't pay it back just because you can, but get it working for you in a way that ties it down for just as long as it is free to have. . . Then pay it back.

If you have any credit card debt that is costing you credit card rates of interest, pay that back ASAP.

Again. Stoozed cash is NOT an asset! It's not money in hand to spend as a deposit on a home.


HTH
JJ

danlightbulb

I'm not stoozing. This is debt I built up in the past. My financial position then has improved and I'm saving whilst renting. I have been paying down the debt at minimum repayments and transferring it at the end of promotional offers.

jennyjj

danlightbulb wrote: »

I'm not stoozing. This is debt I built up in the past. My financial position then has improved and I'm saving whilst renting. I have been paying down the debt at minimum repayments and transferring it at the end of promotional offers.

You say you are not stoozing? But aren't you rolling 0% debt over from promotion to promotion, to keep a debt balance in the air? It doesn't really matter if the original debt balance came to you as cash or purchases, for the sake of this exercise.

Do I understand correctly that the debt is at 0% because it's from promotional offers and that as each offer comes to an end of it's 0% period, you are paying it off from another promotion?

If so, that sounds like exactly what you should do. But of course you are getting zero benefit if the amount of the debt isn't doing SOMETHING for you. That something might be as trivial as giving you the day to day liquidity to live on or the potential to lay down a deposit.

With the 0% promotions that I have used, I would pay the minimum for the interest free period, which would leave a rump balance that would need to be paid off in full at a set date. Never, of course, let the rump balance roll on to a time where interest becomes payable.

The fundamental answer is the same. Pay off any debt that costs you money. If you can do that with another free promotion, then so much the better. But be ready for the day when you have to settle those debts from your cash assets to hand. That cash to hand ultimately isn't your asset, while there is a debt to match.

danlightbulb

18 months ago I had no savings and £11k of debt. Now I have £8k of debt, £4k of cash and £1.5k tied up in matched betting activity.

I have been transferring the debt around on promotional offers, but only because I couldn't previously pay it off. Now I have that option BUT I am saving for a house deposit.

I get your point about my net cash being zero (actually negative).

If I pay off the CC debt then that extends the period I'd need to save for to get deposit built up again.

If I use the deposit on a house, no cash left to repay cards so back to being reliant on promotional transfers.

jamesd

Keep the debt, it's useful as part of your deposit. Consider increasing it using 0% for purchase deals as well to get you to lower LTV more quickly.

There's a trade-off involved. More debt means faster or better LTV and lower interest rate. That helps affordability and also saves you money. But the card payment obligation is quite high in affordability calculations and that reduces affordability. What this means is that if you have plenty of affordability margin debt is a great idea to get you to lower LTV. By contrast, if affordability is your limit, the debt can hurt you and limit how much you can borrow.

However, whatever your eventual mortgage lender may want, today you can improve your position with sensible credit card borrowing in the form of 0% for purchase deals.

You can safely ignore claims that all debt is bad when applying for a mortgage. I got one from one of the fussiest lenders around with about 60% of my mortgage in card debt for stoozing. I had unusually low income multiple so excellent affordability and in any case I didn't need the debt to get to the LTV I wanted.

jamesd

Matched betting will be a really bad idea at mortgage time, any hint of gambling can result in being turned down. I suggest that you stop it six months before applying in case a lender goes back to more than the usual last three months of statements.

danlightbulb

jamesd wrote: »

Matched betting will be a really bad idea at mortgage time, any hint of gambling can result in being turned down. I suggest that you stop it six months before applying in case a lender goes back to more than the usual last three months of statements.

Thanks I'm aware of this, and this was what I planned to do. But at the moment it's giving me a significant boost to my savings pot. I'd be silly to stop.

jennyjj

danlightbulb wrote: »

If I pay off the CC debt then that extends the period I'd need to save for to get deposit built up again.

If I use the deposit on a house, no cash left to repay cards so back to being reliant on promotional transfers.

Exactly! If you 'spend' the cash, it will not be available to repay the debt. That's exactly it, whether you 'spend' the cash on a deposit, or whether you buy food or a new car with it.

You seem to perceive that 'cash' as being an asset owned. It isn't. It's an asset borrowed. If it's due to be paid back in April and you've 'spent' it on a deposit, then you would have to borrow it again from somewhere such as the next promo, or you would have to repay it from earnings, winnings, or somewhere else.

By all means only pay back those debts when they start costing you interest and by all means, get as many 0% promo's as you can, keep them going forever if you have the discipline. But it's never YOUR cash. ( And shouldn't be your betting bankroll, unless you are really clever )
In any case, aren't many of the current 0% offers at a fixed fee anyway of the order of 3% for 18 months, equiv to about 2% a year? Don't take those unless you can squeeze more value from them than they cost or you are just creating a burden for your future self.

danlightbulb

jamesd wrote: »

Keep the debt, it's useful as part of your deposit. Consider increasing it using 0% for purchase deals as well to get you to lower LTV more quickly

I would have the option to increase my debt, as there is a fair bit of headroom on the card's I already have. But I'm not sure it will make a great deal of difference in the long run. If I had £10k of additional debt earning 3%, that's only £300 a year or so. I'm making more than that per month matched betting.

I'm also pre qualified on MSEs credit card tool for a few cards which offer either very low fees or no fees for transfers, so I could do more with those. At the moment however I have refrained from taking out more cards even though I could get them, because I didn't need them.

Wookey

You mention in your original post about only a 100k house or a 140k one, I'd be of the inclination to get what you can afford to get a foot on the ladder earlier and then look to move up the ladder over time. If this is your first house and there is no requirement for the extra space on the 5 year horizon then the housing at the cheaper end of the market is always in demand so you would have no problem selling it to "upgrade" later on. Something at the cheaper end also that has renovation potential in it could see your upside being quite a bit.