Which should I pay off first?

jclay · 27 January 2005 at 5:03PM

Ok, please can someone help me as my head is baffled with figures.

Here is my situation.

I owe:

705.51 on a fixed loan at 7.9%
1136.98 Overdraft at 13.1%
421.12 on Mastercard at 16%
296.94 on Barclaycard at 18%

so about 2500 total.

I can pay on average 200 pound a month to clear debts.

My aim is to be debt free and have saved 2000 pound for a deposit by July 2007.

I think I can acheive this but I want to do it in the quickest time.

I don´t have the option of tarting credit cards as my credit rating is BAD and really I just want to pay things off as quickly as possible.

I was going to pay off the barclaycard then the master then the OD and by that time the loan should have been paid off but although the interest percentage is higher on the Barclaycard I only pay about 5 pound interest a month compared to 15 pound a month on the OD, so which should I pay first????

Please help.

jonesMUFCforever · 28 January 2005 at 12:28AM

Pay the highest interest rate first ie Barclaycard, then work your way down.
With the bank account make sure that you stay below any agreed overdraft facility to avoid unauthorised borrowing charges which can be stinging at about £30 a throw!
You are paying more interest on the overdraft because you owe more than 3.5 times more money to the bank than you do to Barclaycard.
Eric

jclay · 28 January 2005 at 1:46PM

A cheque arrived this morning from the lovely tax man for 435 pound!!!!

Thanks Eric, I know that the interest is higher on the OD as I owe 3 times the amount, that´s my point, should I reduce the OD so that the interest equals the Barclaycard or should I just pay off the Barclay card in full then the mastercard then the OD?

With this cheque now should I use it to reduce the OD so that the charges aren´t so high or completely clear the barclay and a bit of the master?

I have been making an effort to avoid going over the overdraft limit, got stung once before (46 pound!!) and am not keen to repeat that experience.

Hate being in debt.

Spendless · 28 January 2005 at 4:14PM

I agree with Eric. The highest interest first and then in order to the lowest. I've seen this mentioned a lot of times before, on here, Motley Fool and watching a repeat of Money or Your Life, Alvin Hall saying it. What he said was though it's tempting to pay off a bill to eliminate a debt, you need to pay the highest interest first.

Pleased you got something back from the taxman, that should help towards you reducing your debt.

Good Luck and keep posting how you are getting on.

nearlyrich · 28 January 2005 at 4:26PM

In your position I would clear the Barclaycard and if you haven't already cut it up do so now. Give yourself a bit of a chance of not going over the O/D by leaving a bit of the £425 in your current account. Say £50 (or whatever you normally overspend).

Does the £200 include or exclude the minimum payments on all the debts?

If it is £200 extra you will easily clear the debt and then save £2000 by July 2007 if you sit down and work out a plan and stick to it.

Use the budget planner on the main site and make sure you have accounted for everything you spend. Maybe a spending diary would help, make your budget realistic, if it too restricting you won't find it easy to stick to it.

Things to watch for are fees for early resettlement of the loan, using the credit card and running up more debt, having your savings eaily accessible, try a post or internet account (When you have paid off the debts) where it is a bit more effort to get the cash than just drawing it out from an ATM. Usually get higher interest too. Have you done all the usual moneysaving things like checking you have best deals on utilities, (lots of ideas on the main site and/or invest in Martin's Book).

Good luck with your debt clearing and savings plan.:)

dag_2 · 30 January 2005 at 11:48AM

I'm agreeing with ejones and spendless too. You should continue to pay the fixed loan and make minimum payments on the mastercard - but use any extra money to pay off the barclaycard first.

If your overdraft limit is much bigger than your balance, then borrow as much money as you can from the overdraft to pay off the barclaycard and mastercard even earlier. However, make sure you don't go over your overdraft limit; make sure there's enough available credit to cover the loan payments, and card minimum payments too.

Once you've cleared the card balances, clear the overdraft - but don't make any extra payments on the fixed loan until your current account is in credit. Also, don't make any extra payments on the fixed loan until you've read the T&C's, to find out if there's any early redemption penalty.

Hope that helps.

Pal · 31 January 2005 at 5:15PM

Have you tried applying for credit cards? I know that you say your credit history is bad but have you actually tried? Some companies like "bad" credit risks because it means they can earn some interest.

In particular - pick a 0% balance transfer card and apply for it. If that fails then a week later apply for the lowest % "rate for life of the balance" card. See Martin's articles.

If your credit history is bad then there is no real harm in making a couple of applications for new cards. The worst that can happen is they say no.

Just remember to immediately destroy any new cards that you get through the post, along with the old ones!

jclay · 31 January 2005 at 9:43PM

Hi

Thanks for the advice.

I applied online for a few different credit cards and got rejected each time. I was then worried that I had messed up my credit rating even more by doing this.

I shall pay off the Barclaycard immediately then make waves against the Master. I can pay 200 pound a month full stop, the loan and the credit cards are paid form my OD via DD.

My OD limit is 1250 and I am reluctant to let the current balance go any higher as there is a danger that I go over (again!)

Just out of interest why doesn´t it make sense to reduce the OD first so that the interest equals the interest on the Barclaycard and then start getting rid of the Barclaycard???

Also, does anyone have any links to this topic of discussion?

Pal · 31 January 2005 at 10:52PM

The interest rate on the BC is higher, so £100 paid off the BC reduces your interest payments by more than £100 paid off the overdraft.

jclay · 1 February 2005 at 10:31AM

you know what? that sounds so simple!!!!! I think I´ve been analysing this too much!

Ooh and more good news.

A letter arrived today informing me that I have 62 pound in an old account!!! So I shall add that to reduce my debt, hey I´ll be debt free by June 2006 at this rate!!

I have been doing all the usual money saving tips, I have taken on a small part time job boosting my salary by nearly 15% and I know it´s a bit anal but every month when I get paid I cash my cheque and sit down with the money physically in my hands. I have labelled envelopes with the headings "Essentials" "Secondary" "Food" and "Social." The essentials envelope contains the money for rent, bills and the 200 to clear the debt", the secondary has my transport, phone and gym membership, and once I have allocated a food allowance anything left over is mine which means that some months I can pay a bit more that 200 but I always have it.

I´m quite enjoying this now.

nearlyrich · 1 February 2005 at 1:21PM

Well done for making a great start, whatever works for you is good, don't worry about what other people think. It is too easy to spend on cards without thinking about the actual debt. Make sure you pay at least the minimum on any debts and pay them on time as missing the due date can cost a fortune, I have DD set up on my credit cards for full amount (or minimum on my stooze cards.)
I would do a budget using the spreadsheet here, it's amazing wht you forget to allow for and things like holidays and MOT's can sneak up and spoil your plans. Keep going and keep posting so we can keep cheering you on;)

Which should I pay off first?

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