To become debt free, or take advantage of rising interest rates?

Jlawson118

Hi All,

I'm wondering if it's worth paying debts off first, or save with high interest rates instead? As I know Martin would say to pay debts off, but with rates rising I kind of feel it would be more beneficial to save?

I'm currently in the process of selling my flat, as myself and my girlfriend have moved into my grandma's house in May, to help my grandma as with age she's struggling with her mobility and in April was diagnosed with dementia.

Once sold, mortgage and fees paid off, should leave me with £30,000 in the bank, which I'm looking at putting most of this into a fixed rate saver for a year or two, at current rates the interest is projected to be over £1,000 per year.

But I do currently have about £11,000 worth of debt too. I have a £6,000 loan at 10% that has been home improvements. New boiler, windows & doors etc. I will be paying this off to be done with the interest. Then I have £5,000 on a 0% credit card which has been new home fixtures, holidays etc. Not going to lie, things I've perhaps gone a bit silly with over the last year or two. The 0% comes to an end in January or February but I've just seen my bank would accept me for a 0% BT card for 27 months. Meaning I could stick that extra £5,000 into a fixed rate savings and pay it off over 27 months.

In my head this is £185(ish) per month paying off debt, that I would otherwise pay into my savings pot anyway.
Though I'm in two minds as this would sit on my credit report. I know the score itself doesn't mean anything but I do have a high score and a reputable report with no missed payments etc. So how much would £5,000 really affect my future chances of getting credit?

I don't overly forecast to be taking out much credit over the next few years, apart from car finance, which I do currently have but it's on a very low interest rate, which I don't want to pay off in full. But we have a baby on the way due in April too so I'm considering upsizing my car slightly. but thats all I'm forecasting in the coming months.

What is best to do?

MovingForwards

Start over, be debt free. The money you would have paid each month can go into a savings account in readiness for the future without a life of borrowing to fund your lifestyle.

enthusiasticsaver

Pay the debt off definitely. Start with a clear slate. 

EssexHebridean

Get the loan shifted for sure. If the 0% period on the card was longer, then I'd say let it run and just clear it by even monthly payments designed to clear it a month short of the end period, but with so little time left on it, it's not worth doing that - so get that gone as well. That then means your surplus income increased and becomes "yours" - and you can save THAT at the higher interest rates you're eyeing up. And what to save for? Well, that potential change of car I'd think? Unless you currently have something like a smart car or some little 2-seat sporty number then what you have right now should be fine for you, partner and baby, so don't feel you need to rush into a change of vehicle. Also - don't view car finance as just being a regular outgoing that everyone has either - it's really not. The last time I used any form of borrowing for a car was in late 2007 - a year or so before I found this place strangely enough, That 30 month loan ended up being cleared in around half the time of the term as I recall, and since then we have always saved for cars and then been in a position to effectively pay cash - often a route to a far better deal! Just because lots of folk around you are borrowing for things like cars, sofas etc, that's far from the only way to do it! 

I would suggest - allowing that a chunk of your equity from the house sale will be going to pay off debt, ringfence what you would have been paying on your mortgage to go into a long term "house savings" pot along with the balance of the equity ready for when you want to buy your own home again in the future. Re-work your household budget allowing for your new bills etc for the shared house with your gran - be sure that your budget is correct, accounts for things, and takes into account all the sorts of things that it sounds like previously you've just borrowed for - home improvements can perhaps be understood, but IMO you should NEVER put a holiday on credit - if you can't afford to go, then don't go! Use the savings board on here to find the good deals and be prepared to chase those interest rates too! Learn to save for things, that will serve you well in the future - paying upfront (even if perhaps using a CC for section 75 protection, but then paying off in full) means you will be in less of a hole if things should not go to plan perhaps as a result of an unexpected redundancy of similar. That includes things like insurances as well - again often just dismissed as a monthly expense - they don't need to be and almost always they do cost more done that way! 

RAS

What happens when gran dies or has to go into a care home? You need to ringfence your capital and ensure you put substantial savings in over the year.

Jlawson118

RAS said:

What happens when gran dies or has to go into a care home? You need to ringfence your capital and ensure you put substantial savings in over the year.

If my grandma was to pass away the house is left to myself anyway. But the “if she has to go into a care home” has been one of my fears, and not just financially. 

She’s been put on medication that we’re not sure if it’s working or not, but doctors have said it won’t reverse anything but should slow it down rapidly if not stopping completely so time will tell I guess.

But I have had it in mind to rapidly save, and myself and my girlfriend have always wanted to buy our own home so I definitely will be strictly saving 🤞🏻

Jlawson118

EssexHebridean said:

Get the loan shifted for sure. If the 0% period on the card was longer, then I'd say let it run and just clear it by even monthly payments designed to clear it a month short of the end period, but with so little time left on it, it's not worth doing that - so get that gone as well. That then means your surplus income increased and becomes "yours" - and you can save THAT at the higher interest rates you're eyeing up. And what to save for? Well, that potential change of car I'd think? Unless you currently have something like a smart car or some little 2-seat sporty number then what you have right now should be fine for you, partner and baby, so don't feel you need to rush into a change of vehicle. Also - don't view car finance as just being a regular outgoing that everyone has either - it's really not. The last time I used any form of borrowing for a car was in late 2007 - a year or so before I found this place strangely enough, That 30 month loan ended up being cleared in around half the time of the term as I recall, and since then we have always saved for cars and then been in a position to effectively pay cash - often a route to a far better deal! Just because lots of folk around you are borrowing for things like cars, sofas etc, that's far from the only way to do it! 

I would suggest - allowing that a chunk of your equity from the house sale will be going to pay off debt, ringfence what you would have been paying on your mortgage to go into a long term "house savings" pot along with the balance of the equity ready for when you want to buy your own home again in the future. Re-work your household budget allowing for your new bills etc for the shared house with your gran - be sure that your budget is correct, accounts for things, and takes into account all the sorts of things that it sounds like previously you've just borrowed for - home improvements can perhaps be understood, but IMO you should NEVER put a holiday on credit - if you can't afford to go, then don't go! Use the savings board on here to find the good deals and be prepared to chase those interest rates too! Learn to save for things, that will serve you well in the future - paying upfront (even if perhaps using a CC for section 75 protection, but then paying off in full) means you will be in less of a hole if things should not go to plan perhaps as a result of an unexpected redundancy of similar. That includes things like insurances as well - again often just dismissed as a monthly expense - they don't need to be and almost always they do cost more done that way! 

Your wording of how that money straight away becomes mine is what’s just made me decide I will pay it all off.

My main goal and ambition has been to save harshly, and more so for a rainy day. I always grew up encouraged to save and I used to be very good at it, but when I moved into my flat I struggled quite a lot.

I recently commented on another post saying as much as I have been silly with some of my debt, some of it has been a necessity as well. As much as I own my flat, I’ve been constantly under a greedy management company who charge excessive fees. The majority of my debts have been trying to pay them £1,000+ each year, whilst it rises every year.

For example, I pay £500 every six months. I borrowed £500 on credit to pay back over another six months whilst also saving the same amount to be able to save to pay the next charge straight up with no debt. But it ended up being a case of borrowing again and again. Especially when other charges they wanted were rising by hundreds of pounds a time. Different subject but I wouldn’t ever buy a leasehold property in my lifetime again and would advise anybody against it! 

That aside, I’ve borrowed money for improvements, when things have broken and needed replacing. But I also have done silly things like holidays, with the intention of paying back quickly but then other things have cropped up.

With what you mentioned about credit cards, I do have rewards cards that I spend on for the points and do pay off in full regularly. One being the Amex Gold charge card so I have to pay in full 😂

My car finance I worded wrong, I do see it as a debt and not quite just as an everyday thing, as it is a loan and debt is debt. For me I do have a really good car, but I got it on finance as a trial. If I was unhappy then it was easy enough to swap, if happy then I was saving for the balloon payment at the end.
What I was trialling was the fact it’s plug-in-hybrid and after 18 months of having it it’s just really hard work and more expensive to run. What I’m concerned about is the boot space is really narrow due to the high voltage battery, struggling to get my grandma’s wheelchair in too, and therefore I’m looking at getting the same car but the normal petrol version. With more boot space and with the intention of keeping the car for the next 10/20+ years now 

madaboutspots

Definitely pay the debt off. Get it cleared and start with a whole new attitude to debt. It’s not ok and you don’t want it - for anything (mortgage aside). 

If you do that and stick to it, it would be very interesting to see how that changes your attitude towards purchases. 

Perhaps you’ll realise that parting with your own money and not paying on credit will make you consider each purchase more carefully? There’s generally a different and more carefree attitude towards credit purchases than the ouch factor of paying in full upfront. To teach yourself that at this stage in life would bring so much freedom later. 

How special for your Grandma to have you care for her - very special for all of you. Treasure those memories.

Jlawson118

madaboutspots said:

Definitely pay the debt off. Get it cleared and start with a whole new attitude to debt. It’s not ok and you don’t want it - for anything (mortgage aside). 

If you do that and stick to it, it would be very interesting to see how that changes your attitude towards purchases. 

Perhaps you’ll realise that parting with your own money and not paying on credit will make you consider each purchase more carefully? There’s generally a different and more carefree attitude towards credit purchases than the ouch factor of paying in full upfront. To teach yourself that at this stage in life would bring so much freedom later. 

How special for your Grandma to have you care for her - very special for all of you. Treasure those memories.

That is exactly the attitude I want. I’m not going to lie I’ve had a bad attitude towards credit. And I shouldn’t have been. I’ve grown up with money savvy grandparents who always told me “if you ever have to borrow money or take out credit. Buy one thing at a time, pay it off and move onto the next if need be.” 

And yet it’s become so easy to just think, £100? I’m paid weekly, £25 a week for a month will pay that. And then taking more out on top of that. 

I’ve just had a bit of a promotion at work and transferred onto monthly pay, this already is making a difference to my spending habits and attitude. Beforehand I only ever had to wait 7 days to be paid again so I’d throw money away like it was worthless. But now knowing I have to wait 4/5 weeks for the next payment, I feel great being stricter, feeling like I’m in control more with my finances.

I can’t honestly wait for the sale of my flat and to be able to start that fresh slate 

madaboutspots

superb news 👍

EssexHebridean

madaboutspots said:

Definitely pay the debt off. Get it cleared and start with a whole new attitude to debt. It’s not ok and you don’t want it - for anything (mortgage aside). 

I'm going to gently challenge this - Martin used to say that it was important to differentiate between "Good" debt and "Bad" debt. You've already mentioned a mortgage which is one of the things Martin put under the "good" category. Get the right deal for you, do the maintenance as time goes on to ensure that you continue to be on the right deals, and as soon as possible overpay to get it shifted faster. The second thing Martin lumped under "good" was borrowing for education - so a student or graduate loan or the cost of training courses where that education would be advantageous to your career. And finally - in some (not all) circumstances, a loan for a car that was necessary - for example to make a commute to work which could not practically be done any other way.  There can in my view be other "good" debt too - we are currently paying off a 0% credit card from when we purchased MrEH's car last year. Despite the fact that we had already saved the cost in advance (We knew his previous vehicle was nearing end of life and were also facing a situation where due to a new Low Emissions Zone we wouldn't be able to drive it to where it needed to go daily so we'd planned for the replacement) the deposit was put onto our regular CC to ensure Section  75 protection, and then transferred fee-free to a 0% BT card. The amount of the deposit was ringfenced into savings where it has been earning us at least a little interest, and we pay a chunk to the card monthly - the balance is due to be cleared next month. We also put certain spending on a credit card each month - it's mostly paid off as we go along but there is a "safety net" DD set up to clear the balance "IN FULL" (some will be doing a Martin voice when reading that!) if for any reason we miss anything. Over the years we've earned a good bit of cashback doing this - and because we have paid no interest that has been "free money". If you're disciplined enough to ensure that the card is always cleared down or that in the case of a 0% the money was already set aside in the first place and remains set aside then that can be "good debt" too. 

OP I like that attitude of "If you must borrow, do it one thing at a time" - and I think that makes a really good point about debt generally too. Obviously we mostly accept that if we want to purchase a property then a mortgage is a necessity, and for sure, often there may well be a need to borrow something else in the background too - for example car finance as you have said. It's the amount of additional layers that so often get added on top without any real thought though -
- We'll get a credit card for everyday spending - it's easier to manage that way and we'll pay it off monthly....(until the month when a large unplanned purchase goes on and there's not enough money to clear it in full)
- We need a new sofa - it makes sense to finance it as we'll barely notice the cost that way...
- Paypal credit is a good deal as we get it interest free for a few months - great! (except it often doesn't get cleared before the interest free runs out)
- Buy now Pay later for things like catalogue purchases (again, when "later" turns up it can come as a shock and the money isn't there)
- We need to dip into the overdraft this month as we've had a lot of expense - it's fine though, everyone does it...  
It's the normalisation of debt that's the problem, to me. The assumption that "everyone uses credit for...X" (insert car, sofa, new phone, holidays etc - and often ALL those things) and uses of phrases like "Oh you know what it's like, too much month for the money again!" and throwaway remarks about "being in the red" - and it is the combination of those things that trips people up, and leaves them in the sort of panic we frequently see on here. For every person who reads these boards, "sees the light" and starts challenging that normalisation, we've scored a little win.