Velocity Banking

Martico

rlm1234 said:

Martico said:

Thanks - I can see a scheme working to an extent, but it needs iron discipline and isn't for all.

As I understand, on payday you pay all minimums. And then you overpay one CC with your budgeted supermarket etc spends for the month. And use that CC for those spends, and go again. With iron discipline I can see that helping. As long as you know that it doesn't negate the need for tight budgeting. It's a marginal gain, but a marginal gain is a gain. As long as the focus is on debt reduction rather than debt shuffling, I can see it having a benefit.
I still suspect that it's fraught with danger for those that need to change their mindset away from credit, so remain sceptical and would still advocate clearer strategies.

(Edit: obviously, for debt reduction to play a part, this strategy has to take into account a payment that exceeds the minimum (and the prevoius month's spend!) by a fair chunk - you need to see the total going down)

Personally I've found it to be a much easier way to deal with my debt.  Although I do think you're right in that it's not a green light to overspend and that learning to manage a budget should also play a part, so maybe not right for some.  All I can say is that I feel so much more in control and so much happier because of it.  

Out of interest, would you mind me asking about your own debt journey and what brought you to this site? You seem quite evangelical about this method and keen to direct people to YouTube. I can see a marginal gain for some in this method from what you've said so far, but have to admit that I remain a bit cautious about where you're coming from

rlm1234

EssexHebridean said:

This is a dangerous game on so many levels it’s untrue. For someone who is in debt, using one credit card to “free up cashflow” in order to pay off debts elsewhere is just not a good idea. 

For anyone arriving here in debt, seeing this thread and thinking “that’s a good idea” - it’s not. Please see the “stickied” post at the top of the board for the process you need to follow in order to start clearing your debts. 

Hi,  What happens is that you pay a certain amount onto your card to cover all of your expenses that you are going to pay anyway. By doing this you are reducing the cc balance at the start of the month by a greater amount than you would've done previously, e.g. £1k.  So if your card had a balance of £3k it would go down to £2k. The expenses would usually come out gradually over the month . Whatever the dd was previously (say £200) would already be paid, and in addition the expenses would go down to £800, as you can again minus out the £200.  It's just maths. It is not a substitute for a good budget but it does give you back some control.  It may not be the right thing for everyone but it gives you options, and its working for me.  

rlm1234

Martico said:

rlm1234 said:

Martico said:

Thanks - I can see a scheme working to an extent, but it needs iron discipline and isn't for all.

As I understand, on payday you pay all minimums. And then you overpay one CC with your budgeted supermarket etc spends for the month. And use that CC for those spends, and go again. With iron discipline I can see that helping. As long as you know that it doesn't negate the need for tight budgeting. It's a marginal gain, but a marginal gain is a gain. As long as the focus is on debt reduction rather than debt shuffling, I can see it having a benefit.
I still suspect that it's fraught with danger for those that need to change their mindset away from credit, so remain sceptical and would still advocate clearer strategies.

(Edit: obviously, for debt reduction to play a part, this strategy has to take into account a payment that exceeds the minimum (and the prevoius month's spend!) by a fair chunk - you need to see the total going down)

Personally I've found it to be a much easier way to deal with my debt.  Although I do think you're right in that it's not a green light to overspend and that learning to manage a budget should also play a part, so maybe not right for some.  All I can say is that I feel so much more in control and so much happier because of it.  

Out of interest, would you mind me asking about your own debt journey and what brought you to this site? You seem quite evangelical about this method and keen to direct people to YouTube. I can see a marginal gain for some in this method from what you've said so far, but have to admit that I remain a bit cautious about where you're coming from

Hi, I have no affiliation with anyone on YouTube!  I just thought that it would be easier for people to understand if they could see a visual representation because it's quite difficult to explain and also, people should do their own research. I came to this site to try to try to find out the UK view on the subject, but only found one post on it which was quite surprising so that's why I started my own.  I have some credit cards that I'm hoping to pay off using this method and so far it's been working really well for me, perhaps that's why I seem enthusiastic!

sparks_2023

One pitfall could be if the credit card company reduces the card limit after you have made the big start of month payment.

DjangoUnchained

i can only think that this would require such absolute control , easily ruined by the odd unexpected expense and before long it would be out of control. Im sure in theory its a great idea but a distraction from the real reason most people are on this forum in the first place.

EssexHebridean

rlm1234 said:

EssexHebridean said:

This is a dangerous game on so many levels it’s untrue. For someone who is in debt, using one credit card to “free up cashflow” in order to pay off debts elsewhere is just not a good idea. 

For anyone arriving here in debt, seeing this thread and thinking “that’s a good idea” - it’s not. Please see the “stickied” post at the top of the board for the process you need to follow in order to start clearing your debts. 

Hi,  What happens is that you pay a certain amount onto your card to cover all of your expenses that you are going to pay anyway. By doing this you are reducing the cc balance at the start of the month by a greater amount than you would've done previously, e.g. £1k.  So if your card had a balance of £3k it would go down to £2k. The expenses would usually come out gradually over the month . Whatever the dd was previously (say £200) would already be paid, and in addition the expenses would go down to £800, as you can again minus out the £200.  It's just maths. It is not a substitute for a good budget but it does give you back some control.  It may not be the right thing for everyone but it gives you options, and its working for me.  

I understand what you are advocating. It is not, however, the right thing for the vast majority of those on this board to do. It's also really unusual that we get new arrivals on here quite so vociferously shouting about this sort of thing - which is what Martico was alluding to (very delicately too @Martico - well done! ;-) )

The first step for those in debt is almost always to learn to budget and to step away from credit, There is time once someone is debt free for them to learn to use credit cards "to their advantage" if they wish to do so - indeed, there are plenty of us on here who have been doing exactly that for years, without needing to carry any debt at the same time! 

13thlegion

It is a bad idea because it adds an extra layer of complexity when simplification is needed, and carries a very high risk of going wrong.
In summary as pure maths it does save money. In strictly maths terms the saving is insignificant. It adds extra steps for zero emotional reward and insignificant financial. It doesn't change behaviour and relationship with credit in a constructive way. If, and when for many, it goes wrong the debt hole is bigger not smaller.

In Full.
First the maths. All figures are fictional and used to keep the example straightforward.
Scenario: 2 credit card debts each of £1500 (24.9% APR on each one). Payment of £200 on each. Income £1400. Other expenses that a card can be used to pay for £1000. (Income a little figure low to represent what is left after a mortgage payment or other expenses that cannot be paid by a CC.)

Standard method pay £200 of each card and use the remaining £1000 to meet other expenses. End of month you have spent all your money and both cards have accrued approximately £28 interest each for final balances of £1328 on each one. You are debt free in 9 months

With the velocity method you pay £200 towards CC1 on payday. You pay £1000 towards cc2. You have satisfied the need to pay off cc2 and then use cc2 to meet your £1000 expenses. For simplicity to calculate daily interest I've assumed that £250 has been spent each on day 4, 11, 18, and 25 of the month. End of the month you have £200 of income unspent, cc1 as accrued £28 interest and is at £1328. CC2 has accrued approximately £19 interest and has a balance of £1519.

If instead you use the £200 on cc2 as well and only spend the £1000 it will gain £15 interest and be on £1315 at the end of the month. If you use it on cc1 you will gain approximately £21 interest on it for a balance of £1121 at the end of the month.

So with velocity method you gain between £7 - £13 a month. 0.5% - 0.9% of the income which you would be hard pushed to argue is a statistically significant change. There is no change on the date to which both cards are fully paid off.

The requirement is that if you do velocity method you absolutely have to stick to a budget that you set when there is credit on the table available to you. However for many of us, we are on this board precisely because in the past we have not been able to stick to a budget when there is credit available. 

In a standard method you also have to stick to a budget. The key difference being what is recommended most often on these boards is to take the option of using credit off the table completely as an option. If we are here we have shown that we should not be using credit or thinking that we can and win, because we have already lost.

The basic rules of paying off debt remains the same - we have to live on less than we have coming in to pay off what we owe. It is simple, but it is not easy. 

Velocity method makes the solution more complicated because it adds more steps. The reward for this is not statistically significant to be worth it.

The emotional significance of even that tiny gain is also washed away by the added pressure it takes in comparison to the standard method. When we come here for the first time we are often vulnerable, worn out, and not really fully understanding what is going on with us. It is seen time and time again and the best advice is always from regulars like @EssexHebridean who all assure us that everything can be alright, and the solution is achievable. Anything that adds extra steps for little or no gain does not help in the emotional space. There may be an emotional benefit if it feels like you are gaming the system and this motivates you get out of debt. But this requires a more stable emotional foundation and a head for figures. Which lets be honest if we had, we wouldn't be in the debt in the first place!

EssexHebridean

The added complication is certainly a factor too! 

Sumof999

hi all thanks for all the comments I do take it all on board - I'm using it as a very short term fix while I get sorted but am budgeting fastidiously and making progress but do totally agree it has to be managed really closely and isn't something I would actively promote at all - thanks for all the wisdom

born_again

rlm1234 said:

I'll try to address some of the comments. If you make a payment on to your credit card of £1k, this will of course reduce the balance, eg if you owe £3k, balance will go down to £2k. Shopping & petrol are bought gradually over the course of the month therefore the interest for those purchases will only be charged as you make your purchases at a daily rate (I think). You have to eat etc and so you might as well do so in a way that works better for you.  In the meantime, you don't need to make that direct debit of £200 for the cc because you've already paid the £1k for your expenses. In addition, your expenses will also be less than £1k, they will actually only be £800, so the extra money can go towards the cc debt. Its just basic maths and you're not robbing Peter to pay Paul, your just utilising your credit in a better way. It's just maths, it might not be right for everyone but it's really helped me in my situation.   

Sorry but maths does not add up?

You said previously 
  You would then make a payment to the card for the total amount of the expenditure.  Let's say it comes to £1,000, so that's the payment you will make. 
Now you are saying it's £800, so paying £200 to debt....🤦‍♀️

You need to be aware some CC's still take the DD even when you make a payment to the balance. Halifax being one.