Financial advice

[Poptart4]

I have roughly £5600 of debt and £7000 in savings. Debt is half credit card, half credit union.

Should I .....
(A) Fully pay off debt and be left with much less savings. This makes me nervous as we had a really bad yr financially last yr (hence debt) and dont want to be left without a good amount of savings to fall back on if needed.

(B) Continue to prioritize building up savings and pay the minimum owed on debts each month.

(C) Stop saving all together and pay large amounts off debt each month.

Like i said last year was terrible financially. There was alot of unforeseen expenses which ate up any savings we had and left us at one point without a penny. Literally. I'm very nervous about ending up like that again so am leaning towards building up as much savings as I can. But I also hate being in debt. It plays on my mind.

What would you do?

I would probably pay off the credit card in full, and then use the amount I normally put into savings + the equivalent of the credit card payment into paying off the credit union. That way you don’t wipe out the majority of your savings but get rid of one debt completely with the likelihood of clearing the other much quicker. Or see if I can find a 0% balance transfer - I paid the deposit for my car with a 0% interest credit card and now pay off £32 a month to clear it before the 0% interest period ends.

So you have £1400 really. I would pay off the credit card immediately. Keep the card open if it makes you feel better.
You have access to a line of credit (the credit card) if things get really bad.
If the card was £2800, then you have £4200 of cash at this point.

What is the deal with the credit union - their loans tend to be a better deal than other lenders, though not always. I would aim to pay that off as soon as you can but you may feel better having £4k of cash available and keep the loan a little while longer.

If you were following the Dave Ramsey plan then you would pay off the loan in full as well, be left with £1400 and then build that up until it gets to around 6 months of expenses (fully funded emergency fund under the Dave Ramsey plan is 3 to 6 months of expenses so you could do less but in a global pandemic I would do 6 months, maybe even more).

Thanks for all the suggestions.

I agree it's silly not to know the interest rate of the credit union loan but the loan was to cover funeral expenses for an unexpected death in the family. I wasn't thinking straight at the time and tbh it didn't matter what the interest was, I needed the money.

I'm now thinking I should pay the credit card in full. That way I'll still have half my savings and I can get the credit union paid off by Christmas while still saving a small amount each month.

Are you mad? Pay off all your debts with the savings. Today.

You are paying interest every month on card and loan but not gaining any from savings.

Pay the card off in full but don't close it so you have easy access to credit if you need it.

You say the money was for emergencies but got a loan to pay for what most people would count as an emergency! So you have good enough credit to be able to borrow again should something even worse happens (is there anything worse than an unexpected death?)

If you're still needing convincing, Martin Lewis makes it so clear that you pay of debts with Savings. www.moneysavingexpert.com/savings/pay-off-debts/

16.8% is a lot of interest. I'd pay off half in a lump sum from savings, then redirect money from savings to pay off the rest. So, a combination of A and C.

[quote Poptart4]@Wfhwith3yearold about 6 months to pay off.

@HowLongCanICallitBabyWeight the credit card is 16.8% interest. I dont know the interest rate for credit union but it's a CU so would be minimal.

Savings account is 0.01% which is crap really.[/quote]
Oh my god! Definitely just pay off the debt. Then start to save monthly to build up savings again. If you have unforeseen expenses use the credit card at that point.

And you can get 1-2% on money in the BoS Advantage account.

Or look at NS&I Income Bonds which get 1.15% at the moment.

Or premium bonds but these are usually only competitive when you have a large amount to put in - but tbf if you are getting 0.01% you might as well take the chance.

Build up avoid emergency fund over time of 3-6 months expenses and then start looking at investments.

I'd definitely pay off the CC debt. It's mad to be paying interest on that debt when you have savings.

You'll be able to build up your savings or clear the loan more quickly, because you'll be able to save the amount you would normally pay off the CC. It will also improve your credit rating, so you may be able to access better deals when you next want credit.

What to do about the CU loan would depend on how much of a buffer you feel you need for emergencies v how much you owe, the settlement figure, length of the term, interest rate you're paying, amount of monthly repayments etc.

Bear in mind that if you clear the CU loan early, they'll be more than happy to lend to you again if you have some sort of emergency and haven't built up enough savings to cover it.

I also advocate eliminating all of your debt using your savings. Even the CU loan will have interest higher than your savings so this is saving you more money in the long run. Then you will have 1400GBP in savings and can start rebuilding.

If you do run into any emergencies in the next few months, you can always use the credit card or get another loan. You will still have saved money on the interest up to this point.

Honestly, I really can't see any advantage of holding savings when you have debt unless you savings rate is higher (very unlikely).

Bonkers to not pay off the CC debt now. 16.8% interest is HUGE. This will be ramping your payments up. Pay off the CC ASAP.
Find out what the interest rate is for the CU. probably best to pay it off now too and use any spare cash as savings.

pay off the credit card first
Check the terms of the CU loan and check no penalties for early repayment. Pay that off too if you can without penalty. If there is a penalty, calculate that against the interest you'll pay if you keep to the payment term.
Look around for a savings account with better interest and start building your savings up again - what would you get with the CU if that gives you the possibility of a low cost loan in the future should you need it? If it does, maybe sacrificing a bit on interest earned for that security.

It's a no brainer - you save money paying off the debt! Then save so that you don't have to rely on the credit card.

So by paying off the credit card you have an extra £470 (which would have been the interest) to pay off the other debt, so if you look at it like that it's definitely incentive to adios the credit card. And then cut it up!

Keep the credit card! It is very useful to have access to a pre-approved line of credit in case of emergencies (esp as you will have used to bulk of your savings to pay off the debt). You just need to be discplined on how you use it.

Agree to paying off the high interest credit cards ASAP with just a word of warning - some banks will immediately lower your credit limit when you pay off the balance so you might not have access to credit in an emergency.

What I would do only, not financial advice. Can you tell I work with people in Compliance at an FS company 😂

Speak to StepChange, they’re an independent debt charity and will be able to advise you much better than anyone here.

When you Google them, make sure to look for actual StepChange as questionable ‘debt consolidation for profit companies‘ (not charities) pay for the Google ads when you search for StepChange 😱

I personally would keep a buffer of savings at the moment due to lots of COVID redundancies and lay offs, but I get why you want your debt reduced and this is where StepChange can help you agree manageable payments with lenders/other forbearance measures like payment breaks.

Good luck 👍

Haven’t read all the replies so apologies if someone has offered the same advice.

Possible situation one:

You keep the debt and your savings.

Something unexpected happens that will cost you money. You have to use your savings to account for this unexpected financial outlay.

Should that situation happen, you would end up with reduced/no savings and the same level of debt that still needs to be paid off.

Possible situation two:

You pay off your debt with your savings.

Something unexpected happens. You now have to go into debt to pay off this unexpected financial outlay.

Should that situation happen you would end up with reduced/no savings and a new debt that then needs to be paid off.

Or in other words, should something unexpected happen, no matter which situation you choose, you would end up in exactly the same boat.

Now, let’s say something unexpected doesn’t happen...

Situation one: you keep your savings and keep your debt. The debt will cost you more money to pay off because of the higher interest rates.

Situation two: you pay off your debt with your savings. You are now debt free and the monthly outlay you were making to pay off your debt can now instead go towards rebuilding your savings.

When looked at like this, which option do you think is the best from a financial perspective?

keep enough in your savings to cover a few months expenses (emergency fund). Then start paying down the debt.

When the debt's fully paid off get back to saving / thinking about the future. Good luck!

@flirtygirl

I would

1. Ring the credit union to check the interest rate.

1. Pay off the 16.8% card immediately with my savings or if able to get a 0% card and set the payment up so that the debt is paid at the end of the term.

1. Depending on what the credit union rate is either pay it off as quickly as possible if a low rate or transfer to interest free credit card if eligible.

1. After no 2, if I choose the option of using part of the savings to pay off the 16.8% debt, I would keep the rest of the savings.

This is the best advice on the thread.

You know what Martin Lewis would say!! Pay the debt off.. There's no such thing as "Savings" When you are in debt!