Help to Buy ISA in parallel with paying off CC?

JLammy wrote: »

Current Credit Card Balance:

1. Credit Card 1: £2800 (27.9% APR)
2. Credit Card 2: £1700 (26.5% APR)
3. Credit Card 3: £3400 (22.19% APR)

Available money to pay off or save in the following months:

• April: £3200
• May: £2000
• ...and then £2000 per month going forwards

So approx £8k of credit card debt; and by roughly halfway through July you will have cleared the debt if you devote all the 'available money' towards that goal and not the ISA (not counting the interest on the debts between now and then - but that's not going to be in the thousands and as you're clearing £2k a month, the exact amount of interest payable missed off a simplified timeline estimate won't push the end date out by as much as a month).

Question is:
1) Should I pay £2000 on my credit cards and put £1200 on a Help to Buy ISA this month (April)? And then continue paying off £1800, whilst saving £200 per month after that?

My concern is the 3 months the account needs to be open for, before any bonus can happen, and the limit of £200 per month after the first month

As you mention, you only need to have had the Help to Buy ISA product for 3 months to be able to use bonus monies. So given you are not going to be in a position to use it by July (because your property deposit will be zero by that point, having only just cleared your debts by throwing your cash at them) you don't *need* to get it open as soon as April. Remember, you will get that same 25% bonus on the initial £1200 deposit whether you make that initial £1200 deposit in April and complete in December, or make the £1200 deposit in September and complete in December, or anywhere in between.

So the bonus on the initial £1200 deposit doesn't really come into the analysis. Instead the advantage of doing the £1200 deposit as early as possible - and starting to earn a nominal amount of interest on it, instead of clearing the debts which are costing you circa 2% a month (a 'waste' of £24 pm interest cost) - is just the fact that once you've done it, you can start building up your monthly £200s in the product.

Those £200s will each get a one-time £50 bonus which you wouldn't otherwise get if you hadn't started the ISA early enough to catch that particular month. You can see that catching each of those months with a £200 deposit - instead of paying off debt at 2% a month (a £4 interest cost for every month you have the £200 in the ISA and not paid off the credit card), is worth a one-off £50.

So, starting early doesn't produce more bonus on the initial £1200 but for each month earlier that you start the ISA (e.g. April instead of July) you can get an extra £200 into the ISA and earn your £50 on that. To bother starting early, the total of those extra bonuses (e.g. 3 months early is 3x £50) have to be worth the extra interest you've cost yourself by paying the initial deposit early and those extra £200s for the period over which your debt is still outstanding.

The extra interest you cost yourself on the initial £1200 may be around £24pm (from above), for 3 months is £72; and the extra interest cost from paying those monthly £200s instead of the debts is something like £4pm for 3 months on the first one, but for the second and third ones the £4pm doesn't need to get multiplied by the full three months because by the time you're paying them you don't have as long as three months before the debt clears anyway through your ongoing £2kpm.

From this it seems relatively clear that if your monthly amounts of money available are realistic, the amount of interest you cost yourself by not paying down the debt as fast as possible (by diverting money to the ISA instead) is not going to be hundreds, while the ability to create another two or three months' worth of £200 deposits, (getting £100-150 extra bonus for two or three extra months deposits) should cover it, maybe with some 'profit'.

. Also, the 25% bonus from the ISA will essentially balance out any interest I've paid in the coming months on my credit card - not quite sure that's the correct way of thinking about it, however!

Obviously it's better to get free money than not get free money, unless the efforts to get the free money are more costly or risky than the free money deserves.

It would be the wrong way to think about it if your calculations included the £300 bonus on the first £1200 deposited, because you're planning on getting that £300 whether you first deposit in April or instead in July, August, September. But the £50 bonuses on any monthly £200 deposits that you couldn't have otherwise made if you had started later, is genuine incremental extra free cash, and seems to cover the extra interest it's costing you by diverting some of the available money from not clearing the card debt earlier.

My aim is to be able to buy a house by the end of this year, so making this happen literally means surviving on bread for a bit!

It seems ambitious because if your debts only get cleared by July/August and you're only putting away £2k/m thereafter; and one of those £2ks is going to get used on solicitors and surveys and moving costs; and presumably you need some kind of emergency fund for the risk of things going wrong with the house or you losing your job etc (which I'm assuming you don't already have?) - then that doesn't leave a particularly big deposit, so only gets you the worst interest rates because of the high loan-to-value of the property you buy.

One observation is that although the debts are very expensive, if you are putting a little into the ISA in parallel with clearing the credit cards then when something goes wrong with your planning and you lose your job or whatever then at least in an emergency you can live on some of the money you had previously put into the ISA. Not ideal of course, but there are usually some living expenses that can't go on a credit card (like rent, petty cash items etc) so if you were literally putting every penny towards clearing the debt, that credit card 'space' created by paying them down couldn't necessarily get you through a period of unexpected hardship.