What is best - pay off a chunk of debt or have emergency savings. Some debt advice please

[TryingToBeDebtFree]

I have name changed for this.

I have spent the whole evening trying to work out my finances and feeling a bit like I need to so something about it, but not sure what is for the best.

I'm a single parent with one child, I currently work part time and have been trying (and failing) to get a full time job for the past year.

I've recently moved house to a more expensive property, due to damp issues in my last place. This is really what has tipped me over into panic mode

My incoming are wages, working tax credit, child tax credit and child benefit. I have 3 main debts totalling just over £3500. I am making minimum payment on these every month (haven't missed one) min payments total £212 a month.

I'm left with enough to get by on if I'm careful but not really clearing the debt off.

I have £2000 in savings. I don't have any family and I'm on my own with my dc so I quite like having this safety net if any emergencies come up, or for dipping into at Xmas etc. I live in fear of having no fall back if there was a crisis (not sure what?!)

I'm now wondering if it would be best to use savings to pay off one debt completely and a part of another. This would reduce my outgoings but leave me with no fall back money. This does seem the most sensible but it scares me.

Also is there a way to freeze interest on accounts without defaulting? Or would I have to miss payments to get companies to even consider this?

I'm really trying to get a better job as I can't see how I can cut my outgoings further (tied into contracts etc) although I could possibly reduce my food costs. My new outgoings are around £150 a month more than they were and I'm really feeling it.

Any advice would be much appreciated :)

How is your debt management? Are you paying off more than minimum each month?

You say '...not really clearing the debt off' Does that mean you have no actual date for when you'll be debt free?

I liked having a chunk of money available for emergencies. (car/boiler repairs for eg) so that I didn't add to existing debt if needed. However if you are struggling to live off your incomings as well as having a decent repayment plan then paying off a chunk might be a better idea.

sorry just seen that you are making minimum payments only. It's not good long term. I'd go for paying off one and leaving the rest of your savings where they are.

can you pay off one of the debts completely?
then save the rest?

Up until I moved at the beginning of the year I was slowly paying them off, now I'm basically paying maybe £5 or so over the min payment with no end in sight.

I'm wondering if perhaps using £1000 to completely clear off one, then using the money I'm saving from that payment to pay off a little extra to the other 2 would be the way to go. That way I would still have £1000 for emergencies.

I feel like I'm currently only clearing the interest each month and no more.

I'm also going to start writing down everything I spend each day and try to do weekly food shopping as I've gotten into the habit of picking up small amounts of food every day or so. So really need to meal plan. But can't really see any other ways of cutting down.

Thanks everyone! I hadn't heard of Christians against poverty so I will look into that.

I sold anything worth selling before the move to fund the costs of flooring/decorating so I have nothing left now! (But doing it definitely made moving easier!)

Oh hell yes monitor your daily outgoings. Meal plan and weekly shop at Aldi.

There's been some great money saving threads on here in the past, lots of good tips, ideas and recipes. You should look them up. Or start a new one, mumsnetters are incredibly helpful at shit like that.

If you're only paying minimum payments then I would suggest using your savings to pay off debt. If you were at least paying down the debt then I would suggest otherwise. Do you have a credit card? This is what can be your 'emergency' fund if needs be.

How is the 3500 made up? ie, is it credit cards, store cards or something else?

If it is credit cards then I would suggest speaking to the credit card companies and seeing if any of them will give you 0% on balance transfers. If one of them will, then pay that one off in full and then transfer the balances to it. That way you will not use all of your savings but you will also not be charged interest on the debt remaining.

I would also recommend that you talk to CAB or one of the other free debt advice services.

My personal view on your situation is that you should use the bulk of your savings to pay off the debt costing you the biggest interest %. I realise that having £2000 in the bank must give you a sense of security but it will only be earning 2% or so and is therefore costing you money every month. Keep back £200-300 only as a buffer against unexpected expenses. The money you will save in debt interest can then be used to pay off the next most expensive debt. The principle is called 'snowballing'

The debt is made up of a credit card (Around £1050) a store card (around £750) and a catalogue (around £1700) The catalogue has the biggest % interest, but the store card is also high. I am going to pay the store card off completely, as there really isn't much to go.

Do you think it would be worth transferring some of the catalogue balance to the credit card, as then it will be a lower interest?

I think I am just having a bit of a panic as I was doing ok, but just all my bills have increased recently. I think if I clear one and partially pay another off, and increase my monthly payments and try to cut down on food and other expenses I should be ok.

I have a job interview next week, so if I could get that it would also really, really help! Fingers crossed.

I would seriously pay off the catalogue entirely if that is the highest interest rate and keep back £300 for emergencies. If you no longer had to make a monthly payment to the catalogue, how much 'spare' would that generate each month? Take that amount of cash and use it to pay off the store card next. If you keep going this way, you will reduce your outgoings and eventually the £212/month you used to spend on debt can be used to build up your savings again.

I know what you mean about emergency savings.

I'd pay off the catalogue completely. Keeping £300 in emergency savings. Then I'd transfer both the store card and the credit card onto a new 0% balance-transfer credit card, and pay that debt off at £212 a month.

Or, if only £300 safety net scares you, pay £150 a month towards the 0% balance transfer, and the remaining £62 back into savings to build the £300 up to £1,000, then pay £212 every month towards debt.

Good luck!

Not got time to write long reply, but my immediate thought is that your savings in the bank will be earning less interest than the amount that is mounting up on your debt.

So I would clear the debt first. Clear the one with the highest interest rate first, and then see if you can get a 0% interest rate for a year or so to clear the others.

Thanks everyone, that does make a lot of sense. I am paying roughly £100 a month to the catalogue so I would then have that 'spare' to pay £50 a month extra to the other 2 which would get them both down a lot sooner.

Only having £300 as a safety net does scare me a little but hopefully there will be no major emergencies and in time I can start building that back up.

If I get the job next week my income would increase by around a 1/3 which would help a great deal. But best to plan for not getting it.

Thanks for helping me see sense!

DEFINITELY apply for an interest-only credit card, and put the CC debt and the store card debt into it. Definitely. Check the Martin Lewis website (moneysavingexpert.co.uk) for the best ones and do their "virtual application" check to see if you'd get one.

Good luck in your interview!!!!!! Hope you come back here to celebrate once the job is yours!

I'm not sure I would be accepted for a 0% interest card. But I will definitely check out moneysavingexpert. A virtual application sounds good!

Thanks very much. I have an interview coming up and 3 applications on the go just now, so I will just keep going until I finally get something!

Come and join us on the debt support thread for lots more support/advice...

If it were me though Id plough all but £500 (keep this as your emergency fund) into your debt,start with the one with highest interest rate and work down through the others. Throw every penny you can at highest rate debt til it's repaid. Then start on next highest interest rate, again every spare penny you have and the min payment you were making to the first debt.

Review all your outgoings...cut what you can, move to cheaper providers where you can. Meal planning is your friend too!

If paying off the catalogue frees up £100/month, use that to pay off the store card which you would do in about six or seven months. Then you'd have the catalogue money and the store card money to pay off the credit card. Do make sure you cancel the catalogue and cut up or stop using your credit cards while you're doing all this.

A word on 0% card transfers. The lenders usually charge a fee for doing this which can be 4% or 5% of the balance. So work out if that makes you better off than overpaying each month.

Hope you get the new job

The interest rate on catalogue debt is normally through the roof (25-30% APR?) so definitely get rid of that. My advice would be never to get credit through catalogues and store cards. It's the same as using a credit card but they charge ridiculous rates. At least with credit cards you can shop around and if you're canny minded, switch your balances between 0% cards. I don't have anything on a credit card now but I used to, and I have 3 cards all of which tried to outdo the others with the offers I got so I was constantly switching the money around. But do watch the transfer rates for doing that.

Well done for trying to address this, you sound quite sensible and practical, which is a great start. Just a thought re: the 0% credit card - if you pay off the £1700 catalogue debt, once this reaches your credit record it should improve and even if you wouldn't be accepted now, you might be able to do that in a few months, particularly if you are then able to pay more off the other other two debts than the minimum payments. I have managed to rebuild my credit rating from terrible to excellent. it takes time and dedication, but it can be done! Good luck, you are moving in the right direction!

If you can face paying off a chunk from your savings, I would.
Then look for which debt has the greatest APR. Pay the min off each of the other 2, and put everything spare you can onto the one with the highest debt. Get rid of it.
Then start on the debt with the next highest interest rate.

If you paid off the credit card with the savings (I know, it probable has the lowest APR), could that then act as your emergency fund, if you really needed one? I don;t know about the sensibility of this!

Definitely use the savings to pay off catalogue in full. Keep £300 for small emergencies. Then snowball the small debt paying minimum + £5/£10 off the other one every month, with every spare penny going off the small debt until it is clear. Then every spare penny off the last debt until it is cleared.

Hopefully your applications will be successful and you can bring your income up too.

Join us on the debt thread for encouragement - we're a nice bunch and you can get loads of support in months when you're flagging and tempted to spend. Here - www.mumsnet.com/Talk/legal_money_matters/2062902-Debt-Number-3-For-those-who-feel-they-are-drowning-and-want-a-way-out?

I just wanted to come back and day thank you to everyone for all the advice.

I got the job I applied for! So in a few months I'll be in a much better position financially and will hopefully be able to get these debts shifted!

Thanks again

That's great news! Congratulation