What to pay into first?

OscarG

I'm about to receive an inheritance of £24,500 cash, and I'm wondering what would be the best use of this money.

I have a personal bank loan balance of £22,300, which I can settle early in full without penalties for £17,400 (saving the remaining interest at 11.3% APR). This seems like the most immediately impactful option to me, and I'd have some £7,000 left over after.

I then have the following credit card debts:

• CC1: £1,500 out of £14,000 limit at 29.9% APR
• CC2: £7,700 out of £8,500 limit at 19.1% APR; of this:
  • £4,100 is 0% interest until January 2024
  • £2,800 is 0% interest until January 2025
• CC3: £5,000 out of £12,800 limit at 0% APR until October 2024
• CC4: £7,100 out of £8,000 limit at 0% APR until November 2025

I also have a small LISA pot (just on the remote off-chance buying a house is ever realistic), and I haven't used any of this year's allowance yet, so I'm also aware of the option of turning £4,000 into £5,000 via the government contribution.

The bank loan and CC1 are the basically only ones I'm paying any interest on currently, so those seem like the obvious targets to pay back first. But while I know those interest-free chickens will come home to roost eventually, I'm really torn on where to put the rest of the incoming money right now.

Any thoughts are appreciated!

Brie

Well I'd start by nuking CC1 and possibly close that account.  That's a silly amount for interest.

I might be tempted to pay the £4100 coming up on CC2 as that will be high interest in a very short time.  Is there spending on that card too as the numbers don't add up.  That possibly is costing you a lot as well as banks will likely say that interest is due from the date of purchase rather than giving you an interest free break.  (unless it's M&S which does seem to allow this)

Then I'd pop the rest into a spreadsheet to show what the totals are, what the monthly minimum DDs are, and work out how muck will be left to pay when the 0% deals end.  

If you factor in the loan being cleared then you'll know how much extra you have to either put into a high interest account somewhere while you wait for the deals to end or to chuck at the loan so you have those monthly payments available for something else too.  And check if a partial payment shortens the term or lowers the monthly payments.  

OscarG

Thanks for the thoughts! The spreadsheet sounds useful, I'll start building that!

There is indeed a small amount of spending on CC2, as CC1 is from a certain issuer famous for high interest rates and sometimes spotty acceptance with merchants, so CC2 is my (more widely accepted) backup.

I can freely pay back any amount on the bank loan in addition to the monthly payments, but it indeed does not shorten the term, only lowers the monthly payments. I think that's another reason why settling the loan in full feels tempting to me.

Letting the leftovers sit in a savings account until the 0% deals end didn't occur to me, that's a good idea! Thank you!

RAS

I'd start by paying off CC1 and close that card, and pay off the interest bearing part of CC2, reduce the limits on the other cards to say £200 over the current balance, then wait three months and see what other offers might be available.

You may well then be able to extend your 0% period on the other cards and pay off the loan

TheAble

How have you accumulated 40k of debt? Using inheritance to clear a chunk of it may bring short term relief but unlikely to help you in the long run unless you change the habits that brought it about in the first place.

OscarG

RAS said:

I'd start by paying off CC1 and close that card, and pay off the interest bearing part of CC2, reduce the limits on the other cards to say £200 over the current balance, then wait three months and see what other offers might be available.

You may well then be able to extend your 0% period on the other cards and pay off the loan

Thanks - out of interest (no pun intended), what's the utility of reducing the credit limit to match the balance? Does that sort of thing trigger offers?

TheAble said:

How have you accumulated 40k of debt? Using inheritance to clear a chunk of it may bring short term relief but unlikely to help you in the long run unless you change the habits that brought it about in the first place.

Completely agreed. While I'm certainly not innocent of some impulsive spending, a chunk of it is the result of having a pre school aged child in today's Britain. Nursery fees alone are £1,450 per month after the Tax Free Childcare scheme (and we've looked at all sorts of alternatives, finding none). Taking on these direct costs (nursery, nappies, food, clothes, furniture) and indirect costs (larger flat, car, petrol, energy) ate up all of our discretionary income and then some, and therefore our ability to repay credit as quickly as we would've liked. Simultaneously, some health struggles prevented my partner from working as much as they could've otherwise, reducing our household income by some 18%.

Making all the painless and some painful cutbacks in spending we could was almost immediately cancelled out by the energy and cost of living crises. Shuffling cards to get as much of the debt interest-free as possible was a fairly recent move (saving ~£500/mo in interest), due to no offers being available to me previously. I'm hoping the incoming 15/30 hours free childcare scheme will ease up our nursery bill a bit soon. We've now also moved somewhere significantly cheaper, saving 35% on monthly rent - though time will tell if we end up spending those savings on petrol instead.

All in all, things are still difficult, but slowly on their way to a more positive direction I think.

RAS

If you have 3 cards with £10k limits each,  but only borrow £21k in total, assessments of your worthiness for more credit, at better rates, may be based on the assumption that a) you already have £30k worth of accessible credit, b) that if you are happy to pay 29%, you are already struggling. 

Getting shot of the high interest card will help your profile, as would limiting the amount of spare credit you have. Keep enough for an emergency until you have an emergency fund.

Martico

It's far from an exact science, though. I wouldn't close CC1 myself, unless it's a "credit builder" style card. Pay it off in full, absolutely, but I see little harm in keeping it, so long as it's no longer used or fully paid off when it is. There's a chance, if it's from one of the main banks, that they'll subsequently offer a 0% BT deal which may be useful if you're coming close to the end of one of your current deals. I've ended up with 30k in unused credit lines and get 0% offers from most, so unused credit isn't in itself a bad thing. 
Main things though are to pay off ones bearing interest and ensure that you have a cash-positive budget from now on. 

TheAble

It's difficult to word this diplomatically but consider how much your OH is earning and if it's worth it. If not working you wouldn't have the nursery fees, the car maintenance costs (assuming 2 cars?), petrol, money tied up the in the car that could otherwise be invested/used to pay off debts, time spent commuting, and so on.

As a crude calculation if she's earning £25k - 30k gross a year then that's £1750 - £2000/month net so based on the above, effectively working for nothing. Of course there are other factors at play but on a purely economic basis, to me it doesn't make sense unless she's earning meaningfully more than that, or has scope to materially increase earnings via promotions etc.