Investing £30k to pay off debt?

Winnie_Cat

I'm new to investments/savings so my question may be naive, but please bear with me! I'm about to receive a lump sum severance payment (£30k) and wondered if there was any way of investing it and using any interest earned to pay off credit card debts. Debt Free Wannabes all advised just to use the lump sum to pay off debt in one go, but I just wondered if there was an alternative option to that.

I've currently got 5 different credit cards, totalling £13755. Total minimum payments on these is £290 per month. Two of these cards are charging interest and the total debt on both of these cards is £2500.

I wondered if it would be possible (or sensible?!!) to put aside enough money to cover the first year's payments of credit cards (£3480) and then invest the remaining £26,500 of the lump sum. Is there any way that could generate enough interest to cover future years' payments? Although should I pay off the credit cards charging interest first in one go, then invest the rest?

This might be a mad idea, but any views or advice from those who understand such things would be much appreciated!

Thanks

talana

Do the sums and work out what savings rate you'd need to earn enough interest, then you can see if it's a realistic option.

For example, if you could stick your £30k lump sum in a top cash ISA at 6.5% (which of course you can't!), then it would give £1950 annually in interest (if my maths is OK).

Regular savings accounts are out as you can't just deposit a lump sum.
You'd need 8.125% from a standard savings account to match that ISA return!!

CLAPTON

what are the interest rates on each of the debts?

Winnie_Cat

Hi Clapton

I'm paying 1.73% per month on a Virgin credit card and I'm about to pay 18.9% APR on a HSBC one from 2 April 08. The other three cards are currently all interest free, but I'm happy to keep getting new 0% deals and transfer balances when the deals run out if that makes sense!

JimmyTheWig

You imply that some of your debts are at 0%.
If this is the case then there is no need to pay them off until they start to attract interest. Put the money in an instant access savings account (use a cash ISA if you want). This is stoozing.

If, however, you're trying to beat the interest that you're paying I think you'll find it tough.
When you say "investing" do you mean on the stock market? If so there is a great risk to this. While in the long term the stock market should out perform cash investments you can't guarantee it. Can you afford to risk loosing some or all of this money?

CLAPTON

1.73% monthly is equivalent to 22.8% APR so pay it off asap
similarly pay the 18.9% off

unless off course you can transfer to 0% deals in which case just keep the money in the best savings a/cs you can find.

Winnie_Cat

JimmyTheWig wrote: »

You imply that some of your debts are at 0%.
If this is the case then there is no need to pay them off until they start to attract interest. Put the money in an instant access savings account (use a cash ISA if you want). This is stoozing.

If, however, you're trying to beat the interest that you're paying I think you'll find it tough.
When you say "investing" do you mean on the stock market? If so there is a great risk to this. While in the long term the stock market should out perform cash investments you can't guarantee it. Can you afford to risk loosing some or all of this money?

Three of the cards are interest free. If I keep transferring these balances to new 0% interest offers, I know I'll have to pay a 3% fee in most cases, but I guess if I get new cards that offer 0% interest for 12 months and my savings are in a 6% interest earning savings account, then does that mean I'm still 3% better off on my savings? I know that sounds obvious, but I suspect it's not be that simple!

I can't afford to take any risks, so will stay away from stocks and shares I think.

JimmyTheWig

Very sensible on the stocks and shares front.
As to the 0% transfer business, read the Stoozing article.