Maths question - Pay off 0% spending card with savings or balance transfer and keep savings?

Kaston

A while ago I had a large purchase to make.  I had the money in savings but decided to keep my savings and make the purchase using a Tesco 0% spending card while just paying the minimum amounts.  The 0% period is nearly over and I planned to pay the card off with my savings until I received an offer from another of my existing CC providers offering 0% balance transfer with a 3% fee.  I have a zero balance on this card and won't be spending on it.

I know this is more of a maths question rather than asking for advice but would I be better off paying off my Tesco card with a balance transfer, incurring the 3% fee but keeping my savings (currently in an instant savings account paying 4.3%).

For example paying £5000 off the Tesco card would leave a balance of £5150 on my transfer card.  That same £5000 would earn me £215 over 12 months at the current rate.  So almost a no brainer until I tried to work out if it would be worth paying off the £5000 in full and putting the money I'd be using for the minimum payments into a regular savings account.  I also realise that the interest on the instant savings account is likely to reduce over the 12 months but for this question I want to assume it won't.

Are there any maths whizz kids out there willing to help me work it out please?

surreysaver

How long is the 0% period for? Is it 12 months as implied by your post? And how much are the minimum payments on your credit card the balance will be transferred to?
Will you pay tax on your savings interest, and have you used up your ISA allowance?

Brie

Well the simple answer would be to say that if you have £5k in savings at 4.3% or use £5k on a BT to pay off the card with a fee of 3% then the difference is 1.3% or £65 total.  That's assuming the interest on the savings account doesn't change over the course of a year.

But if the BT period is 18 or 24 months there's more savings to be made by doing the BT.  if it's 24 months it's basically 1.5% a year for the fee making the savings 2.8% or £140.  

And it all assumes that you have the a good portion of the £5k still available to pay off the balance at the end of the period and don't make any mistakes about the option end date and end up paying a stupidly high percentage for a week or two.  

Grumpy_chap

The OP needs to take into account any income tax that may accrue on the amount on deposit in the savings accounts.  There are various allowances that mean the income tax on savings may be NIL, but it is at least a matter to consider.

vacheron

As above, the major factor is the duration of the balance transfer being offered.

If the balance transfer is 0% for 12 months, then you should benefit by 1.2% of the balance (the difference between the fees and your savings rate) assuming that you won't pay tax on your savings income.

However, if the balance transfer was for, say, 24 months then your savings could also make you another 4.2% in the following year (a total of 8.4% interest for a 3% one off fee) meaning you'd be an extra £215 better off.

You could save even more if your new balance transfer card limit is higher than your current £5000 balance by placing any (necessary and planned) large purchases on your orignal card just before the transfer, and then transferring that to your new balance transfer card too.

Also, if your original card offers a "money transfer" you can use this to transfer cash directly into your savings account, and then transfer this balance to your new card at 0% too. 

This is known as "stoozing" and is a wonderful but potentially dangerous rabbit hole depending on the amount of self discipline exhibited by the "stoozer".   

Kaston

surreysaver said:

How long is the 0% period for? Is it 12 months as implied by your post? And how much are the minimum payments on your credit card the balance will be transferred to?
Will you pay tax on your savings interest, and have you used up your ISA allowance?

Very good points that I should have mentioned in my original post.  Yes the 0% period is for 12 months with my existing card, although I would consider taking out another card with a longer 0% period.  Minimum repayments are 1% of balance.  Yes I will pay tax on my savings interest and yes I have used my full ISA allowance.

I hadn't considered doing a BT until I received the offer from an existing provider.  I know if I shopped around, I could get a better deal but due to the amount of variables, I'd like to stick with the card I've already got for the sake of this exercise. 

NorwichMan

It's likely in my opinion that the interest rate on easy access savings accounts will continue to decrease, possibly significantly, over coming months. Whilst it's impossible to predict how this will change over 12 months, if you do the balance transfer there is an element of risk involved and you may end up with very little net "profit". Or even lose money if savings rates drop under 3% for a sustained period. Of course, it could go the other way if savings rates increase. I'm personally reducing my stoozing as I expect it to become less profitable or worthwhile.

surreysaver

So, you're 4.3% easy access account is equivalent (I'm assuming you're a 20% tax payer) to 3.44% after tax.
You'll likely want to pay off the credit card a little early, so likely have the money saved for 11 months.
I think you'll break even. It might be handy having the cash available, so might be worth doing.
If you will have cash available from elsewhere to pay it off, consider putting it in a fixed account for a year. Or regular savers which pay 6-7% (there are some regular savers which allow access to your money, so have a look at those).

The fact your minimum payments are only 1% is good - they're normally in the region of 2.5-3%.  When you're playing this game, you normally want to go for the longer 0% periods and the higher savings rates.  No harm in using special offers from existing cards, though, it all adds up.

Superhoopza

surreysaver said:

So, you're 4.3% easy access account is equivalent (I'm assuming you're a 20% tax payer) to 3.44% after tax.
You'll likely want to pay off the credit card a little early, so likely have the money saved for 11 months.
I think you'll break even. It might be handy having the cash available, so might be worth doing.
If you will have cash available from elsewhere to pay it off, consider putting it in a fixed account for a year. Or regular savers which pay 6-7% (there are some regular savers which allow access to your money, so have a look at those).

The fact your minimum payments are only 1% is good - they're normally in the region of 2.5-3%.  When you're playing this game, you normally want to go for the longer 0% periods and the higher savings rates.  No harm in using special offers from existing cards, though, it all adds up.

Unlikely I'd say that the rate would be 3.44%, as at 4.3% you'd have to have £23k saved to breach the £1000 fresh hold. Unlikely that someone would have £23k saved if they have £5k of credit debt.

surreysaver

Superhoopza said:

surreysaver said:

So, you're 4.3% easy access account is equivalent (I'm assuming you're a 20% tax payer) to 3.44% after tax.
You'll likely want to pay off the credit card a little early, so likely have the money saved for 11 months.
I think you'll break even. It might be handy having the cash available, so might be worth doing.
If you will have cash available from elsewhere to pay it off, consider putting it in a fixed account for a year. Or regular savers which pay 6-7% (there are some regular savers which allow access to your money, so have a look at those).

The fact your minimum payments are only 1% is good - they're normally in the region of 2.5-3%.  When you're playing this game, you normally want to go for the longer 0% periods and the higher savings rates.  No harm in using special offers from existing cards, though, it all adds up.

Unlikely I'd say that the rate would be 3.44%, as at 4.3% you'd have to have £23k saved to breach the £1000 fresh hold. Unlikely that someone would have £23k saved if they have £5k of credit debt.

The OP reported that they do pay tax on their savings in the sixth post of this thread, which is why I quoted that rate.
Anyone playing the 0% game is highly likely to have savings out-balancing debt

Superhoopza

surreysaver said:

Superhoopza said:

surreysaver said:

So, you're 4.3% easy access account is equivalent (I'm assuming you're a 20% tax payer) to 3.44% after tax.
You'll likely want to pay off the credit card a little early, so likely have the money saved for 11 months.
I think you'll break even. It might be handy having the cash available, so might be worth doing.
If you will have cash available from elsewhere to pay it off, consider putting it in a fixed account for a year. Or regular savers which pay 6-7% (there are some regular savers which allow access to your money, so have a look at those).

The fact your minimum payments are only 1% is good - they're normally in the region of 2.5-3%.  When you're playing this game, you normally want to go for the longer 0% periods and the higher savings rates.  No harm in using special offers from existing cards, though, it all adds up.

Unlikely I'd say that the rate would be 3.44%, as at 4.3% you'd have to have £23k saved to breach the £1000 fresh hold. Unlikely that someone would have £23k saved if they have £5k of credit debt.

The OP reported that they do pay tax on their savings in the sixth post of this thread, which is why I quoted that rate.
Anyone playing the 0% game is highly likely to have savings out-balancing debt

Apologies my mistake I missed that. Yes you are correct then.