using savings to clear debt

help_plse

Hi all

Do I clear my debt on credit card of £3000 with money I have just inherited, or I have a new balance transfer credit card which I could transfer the money into at a charge of 3%. Hope you understand what I am trying to ask!!

Help please

supersavershal

Do you mean the balance transfer fee is 3%, if so it will cost you £90 to transfer what is the interest rate on the new card? if it is 0% and you pay the balance off before the 0% ends it will cost you £90.
You need to work out if the interest on the savings will be more or less than £90 if it is less you should pay the card off, if (this is unlikely) it will be more than £90 put your savings away until the 0% finishes and pay it then.
Obviously if the new card has an interest rate which is not 0% then it will cost you more than £90 if you balance transfer.

onamission_2

or ring your CC company and negotiate a full and final settlement figure?

help_plse

Yes new card is 3% for the balance transfer. Just undecided whether to pay the £90 and pay the card of over the year, or pay in full and clear the debt. Head is addled

Sammy_Girl

Hi HP,

Personally I would pay off the debt, and then it's gone. I'm not too good with calculations and working out which works out better - cc versus savings, but personally I would prefer the debt gone

Sammy x

cat4772

Hi HP

I'm still confused... I get that it's a 3% fee to balance transfer, but what is the APR of the new card going to be?

Cat.x

help_plse

Card is 0% for 12 months just have to pay £90 for the transfer. Sorry for the confusion. Just unsure to pay debt or pay £90 and save the £3000!!

Clariman

Hi help plse,

General rule is that it is better to pay off a debt rather than save and be in debt at the same time because debt interest rates are so much higher than savings interest rates.

Given that you have a 0% card, then it is worth looking to see if it is better to save the £3K or pay off the debt. There are 2 different ways of looking at this: one from a pure finanicial perspective and the other from a more psychological one. I'll answer both.

Financial
If you kept the £3000 in a savings account earning 6.5% APR, you'd earn £195 before tax. Assuming you are a basic rate tax payer, after tax you'd be left with £156. That would assume you had the money in the savings account for a full 12 months. In reality you'd probably have the money in there for 11 months (allowing for moving money in and then out again), so that would end up being £143 after tax. Taking off the £90 BT fee, you would be about £53 better off by saving the money.

Psychological
If you there is the remotest chance that you would spend some of the £3000 in the savings account, then I would not risk leaving it there. I'd use it to pay off the debt. After all, you would only be about £53 better off anyway by saving the money. That probably isn't worth the risk of spending it and being left with the debt. It really depends on how strong willed you are.

Clariman

help_plse

Thank you all for replies. Think I have decided what to do. Save the money, although obviously I still have to find the minimum payment each month to pay the credit card