Help me Run the Numbers please

enthusiasticsaver

Narola1976 said:

Please can those who know more than me help me figure out whether this is a good idea:

I have just started snowballing. I have a total figure of £1004. I could up this to £1015, but no more at this stage. I have lots more debt but the two I am concerned about are the ones below.

I have been offered a BT from MBNA - 0% for 12 months, 5% fee. I know this is a big fee. The transfer offer is for £4559. The fee would be £227.95

I owe £8891.57 on HSBS at an eye watering 28.9%. Only £20 or so is coming off the balance due to the interest rate.  I want to use the transfer. But I do not know if this is a good idea. Notwithstanding the fact that I have done plenty of BT before and not learned my lesson, I am not sure I am to be trusted but all I want now is to consider it - to see what it would look like. I would like to think asking advice this time and not just running off and doing it shows a little more maturity. One can only hope.

So the figures:

Current MBNA Balance: £7995.25.         Current Min Payment : £202.51.     Interest 20.93%    
Current HSBC Balance : £8891.57.         Current Min Payment : £222.29.    Interest 28.9%

I think HSBC takes 2.5% of the balance and MBNA 1%.  But I am not sure how the minimum payment is calculated with the interest as well. I have searched for the formula on the internet but there only seem to be overpayment calculators. 

Currently, the 2 minimum payments total : £427.80
My rubbish math has worked out the new payment for both would be £427.86
But I don’t know if that’s correct or if it is worth taking the transfer mathematically I mean

I really need help figuring this out, please can someone give me advice. 

Edited to add : I know I will not be able to clear the 0% amount at the end of the 12 months. But my thinking is maybe its a case of having as much off the high interest one as possible, even if I still end up paying a lot to interest. Isn’t 20.93% better than 28.9%? 

Yes I think it is worth it as you will be saving the 28.9% interest on the £4559 and assuming at the end of the deal it will go to the 20.93% which is still lower anyway.  The interest saved is £1317.55 over the year so if you deduct the balance transfer fee of £227.95 it is still more than £1k saved over the year and the interest differential of 8% on approx. £4000 after the deal expires and allowing for monthly repayments of 1%. 

At your level of debt you should not be using credit cards at all so just putting them away somewhere and getting out of the habit of using them should stop you ramping the HSBC up again.  I would not reduce the limit as sometimes deals look at credit usage when offering BTs so if you are up to 100% or near that this may impact on offers. 

Minimums should be as follows. 

Balance on HSBC after the BT will be £4332.57 at 28.93%. Minimum if 2.5% monthly repayment £108.31 (I would make that £110 and do not decrease as the balance goes down given the rate is so high. Any overpayments direct towards this one. 

Balance on MBNA after the BT will be £12782.20 including the BT fee.  £4559 on 0% and £8223.20 at 20.93%. Minimum payment if 1% and monthly interest on the £8223.20 should be £271.24 (£127.82 plus monthly interest of £143.42).

Effectively therefore you should have minimums on both MBNA and HSBC combined for year 1 of £379.55. Not sure where you got the £427.86? If your snowball allows you to keep throwing maybe £430 at them both I would pay £275 to the MBNA and £155 to HSBC given that is charging the highest interest rate.  It will not pay it off over the 12 months but you will save on interest by using the BT and the HSBC may well be low enough to transfer on to another 0% deal later in the year or next year. 

Narola1976

@enthusiasticsaver thank you very much for this response - it is really helpful. It looks like the BT is the way to go, and I hear you re not reducing the limit. Trust me, I am NOT using any credit cards at all and have not done in 7 months. I do not even have it in my purse. 

Can I ask one more question - please can you tell me how you calculate interest - the formula for doing so. Thank you

enthusiasticsaver

Narola1976 said:

@enthusiasticsaver thank you very much for this response - it is really helpful. It looks like the BT is the way to go, and I hear you re not reducing the limit. Trust me, I am NOT using any credit cards at all and have not done in 7 months. I do not even have it in my purse. 

Can I ask one more question - please can you tell me how you calculate interest - the formula for doing so. Thank you

I am just  using a calculator to work out the annual interest of whichever card so for example the HSBC after the BT has gone through will be £4332.57 x 28.93%/divided by 12 to find the monthly interest.  You can be even more precise by doing it on a spreadsheet and allowing for the monthly repayments but that takes a bit of time to set up so I have worked out worst case scenario.  As the balance reduces the interest will also reduce. 
Month 1 Balance is £4332.57 plus interest of £104.45 less the monthly minimum payment of £110.92.  
Month 2 Balance of £4326.10 plus interest of £104.30 less the monthly minimum payment of £110.76

And so on.  You will notice as the balance reduces so does the minimum (albeit by a miniscule amount if you only pay minimums).  This is why I always recommend you never set the monthly repayments at minimum but set it slightly above so you are always overpaying by even a small amount and it does not reduce as the balance goes down. 

enthusiasticsaver

That would be a good example of how to use a balance transfer.  You are saving on interest by not paying the 28.93% but not reducing your monthly repayments overall so you are using the year to really reduce the balance rather than just covering interest and a small amount of the balance. Balance transfers don't work though if you transfer and just carry on paying minimums because you will not have made maximum use of the BT by really focusing on repaying the debt rather than just covering interest.  

Prior to the balance transfer you are paying minimums combined on both cards of £427.80 but the monthly interest is £139.45 on the MBNA and £214.13 on the HSBC so the balance is only reducing by £74.22 each month. After the balance transfer assuming you continue to pay £427.80  the monthly interest on MBNA would be £143.42 and the monthly interest on HSBC would be £104.45 so the reduction on the combined balances of both would be £179.93 so more than £100 each month would come off the balance combined with no balance transfer.  

Hope I have not blinded you too much with the figures. 

zippygeorgeandben

enthusiasticsaver strikes again

Narola1976

Thank you so much enthusiastic saver. I am in awe of you, I am really determined to get out of this cycle. I have applied for transfer and updated the snowball app. I will report on my progress.

enthusiasticsaver

That's great and I look forward to reading about your progress.