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Original poster

I'm almost ready to start clearing the debts - but I'm confused..........

53 replies

FAQinglovely · 19/02/2009 13:55

I know that you should pay off the ones with the highest interest rate first - yes?

Well I have 2 credit cards - both with similar amounts on them (almost identical actually) but totally different interest rates

One is 30.34% (I know I know I know......)

The other is purchases at 17.95% and cash withdrawals (of which some of it is) at 26.93%

Now I've been paying off the minimum payments on both of these account but now am nearly ready (just a few more other bills to clear) to start paying off bigger chunks to clear them. However the one with the highest interest rate the balance appears to be going down quicker than the one with the lower interest rates when using the minimum payments.

Should I stick with clearing the highest interest rates first or the one where the balance is going down the slowest with the minimum payments??

OP posts:
lulabellarama · 19/02/2009 17:05

This reply has been withdrawn

This has been withdrawn by MNHQ at the poster's request.

Pollyanna · 19/02/2009 17:08

moneysavingexpert has a section on credit cards for those with a low credit rating - it is worth reading his section on transferring money to lower interest rate cards.

Original poster
FAQinglovely · 19/02/2009 17:11

actually my credit rating is ok - it's just the lack of employment which causes the issues.

Not sure I'm going to go back there again.........

OP posts:
lou031205 · 19/02/2009 17:16

They bite but mean well. Bit like here.

Ok, an example:

Imagine for every £1 you spend, you pay 30.4 pence in interest.

You put £5 on your card, so you owe £6.52 (£5 + 5x 30.4p).

You put £5 on your other card, so you owe roughly £5.90 (£5 + 5x 17.95p).

You can see that it has cost you 62p extra to use the high interest rate card.

They can only charge you interest on the balance on your card, so paying off £5 saves you £1.52 on your high interest card, but only £0.90 on the low interest one.

The low interest card will be paid off in order of purchases, then cash, because that makes the company more money.

Original poster
FAQinglovely · 19/02/2009 17:19
  • well I don't like (when confessing my ignorance in my OP) being told I have a bad attitude to risk

I get that bit - but what about when the interest that I'm paying each month becomes lower on the higher interest rate one than the higher one? Because I reckon another 2 months (even at current payment levels) and I'll be paying more interest on the lower interest account each month (and reducing it sooooooooooooooo slowly because the minimum repayment is only 1%) than I am on the higher interest one.

OP posts:
Original poster
FAQinglovely · 19/02/2009 17:24

and I've just checked my recent statments for the lower interest one, and I've nearly paid off the interest on the purchases, 99% of the interest is charged at the higher rate of nearly 27%.

So basically I have 2 credit cards with the same amount on each, 4% difference interest rates but currently paying off 5% each month on the higher one and 1% on the lower one.

What confuses me more is that I used the MSE credit card repayment calculator and even it said that it's going to take longer and I'll pay more interest on the lower interest one at the current rates of minimum repayment than the higher one.

See in my head that means I pay more interest on the lower interest one if I keep it at minimum payments until I've paid the higher rate one off

OP posts:
SlightlyMadScotland · 19/02/2009 17:35

Thing is that the outstanding balance is important too.

For example if the balances are equal

If you owe £1000 at teh higher interest you will end up paying £300pa for teh credit.

If you owe £1000 at the lower interest you will end up paying £270pa for teh credit.

BUT if the balance outstandin gon teh lower rate one is more than the other:

If you owe £1000 at teh higher interest you will end up paying £300pa for teh credit.

If you owe £2000 at the lower interest you will end up paying £540pa for teh credit.

The balances are equal now - but the more you pay off the higher rate the bigger the difference between teh 2 cards will become so you will end up in teh scenario above at some point between now and when the cards are paid off.

Given that there is little difference in interest rates between the two (assumeing 30% and 27% here) then I would pay them off pretty evenly, with perhaps a small bias towards the higher rate.

If you have £50 per month available (for example) I would pay £30 off high rate and £20 off the low rate - so they come down pretty evenly.

SlightlyMadScotland · 19/02/2009 17:36
Original poster
FAQinglovely · 19/02/2009 17:41

oh no - purchases that could be bought with a card go on my Littlewoods account where I get 3 months interest free (after carefull budgetting to ensure I can afford to pay it off within 180 days)

OP posts:
CarGirl · 19/02/2009 17:45

can you ask your bank for a cheap loan to pay them off, if you prove you can meet the repayments it could well be cheaper?

SlightlyMadScotland · 19/02/2009 17:45

Why 180days? Thats 6 months?

Original poster
FAQinglovely · 19/02/2009 17:49

I'm talking crap actually - it's 3 months on most items, and between 6 months and 2yrs interest free on others (latest purchases were 80 weeks).

I just calculate it on 3 months to be on the safe side.

OP posts:
StewieGriffinsMom · 19/02/2009 17:59

This reply has been deleted

Message withdrawn

Original poster
FAQinglovely · 19/02/2009 18:04

nah they won't have me - wouldn't have me 2yrs ago when I was employed and it was with my own bank that I'd been with for about 15yrs at that point.

Looking at the snowball thingymajig think I should be able to clear 95% of it all by the end of this year

OP posts:
Original poster
FAQinglovely · 19/02/2009 18:05

computer said no then (in the branch in person) because my income from employment wasn't enough..........the next page (had it said yes) gave options for other income for which TC and CB could have been included (meaning I could easily have afforded it)/

OP posts:
LadyMuck · 19/02/2009 18:07

FAQ, I may be totally out of date with your situation but I thought that you are a lone parent on benefits? Obv I don't know whether your mainteneance is more than you IS, but if it isn't and you are on IS then get ye to CAB asap. They will probably refer you to a solicitor on Legal Aid but ultimately they may well get the interest rate cut if not frozen.

The advice that you are getting here is perfectly correct if you have a reasonable amount of surplus income after essential expenses, but if you are on IS then it may not be the best advice.

poopscoop · 19/02/2009 18:09

why did they say you had a bad attitude to risk? Blimmin cheek, you are on there asking advice because you are making an effrt to clear your debts. How very dare they!

Original poster
FAQinglovely · 19/02/2009 18:11

yes I'm a lone parent on benefits - but it's amazing what you can do with that extra £40 a week TC and extra CB for the 3rd child as they really don't cost that much and if you're frugal that helps too

OP posts:
mistlethrush · 19/02/2009 18:26

Don't worry about the actual amounts you are paying off - its the rate they are accruing interest that you need to be concered about - it really will be less expensive to pay off the higher rate first, then the lower rate. But if you are able to get reduced rates in any way, that would be really helpful!

LadyMuck · 19/02/2009 18:51

FAQ, seriously, go to the CAB. If you are on IS then the assumption is that that is only enough to cover your basic costs, not necessarily to repay debt as well (or at least not at a greater rate than say the social fund would require).

I know that you can manage, but it could be a lot easier if you at least get the interest frozen, and if a lender see CAB or similar involved then you will get a different response.

Original poster
FAQinglovely · 19/02/2009 19:00

I see your point, but now I'm eligible for housing benefit I feel positively loaded (well I'm not really but I feel it ) as I don't have to pay for my housing costs out of my IS, TC and CB.

OP posts:
LadyMuck · 19/02/2009 19:10

Up to you. I certainly wouldn't advocate that you shouldn't pay off your debts, but to pay 30% interest on them as well is unfair and in effect you are being discriminated against because you are on benefits. If you weren't on benefits you'd get a much better interest deal.

There are organisations such as CAB who will advocate and help you get a better deal. They can do so because essentially someone in your position could also, for example, look at a debt relief order or bankruptcy, thereby leaving the credit card company with very little. So your negotiating position is bizarrely better than someone in paid employment who could be seen to have more to lose via bankruptcy. NB wouldn't recommend bankruptcy, just poiting out that there is a strong negotiating position here, which often results in people having agreements just to repay the debt, not any interest.

CarGirl · 19/02/2009 19:10

I also thought your church may be able to loan you the money and you repay them, you could still pay them interest and have it as a legally binding agreement but it would be at a much lower interest rate I'm sure!

Original poster
FAQinglovely · 19/02/2009 19:17

LM the way I see it is

the lower rate card - I took that out while DH and I were still living together, it was me that withdrew the cash on it, it's my responbility to pay it back - interest and all

The 30% one - well yes I did get a crap rate because I'm on benefits, however I still took the decision to apply for the card, and the interest rate the came with it - so again my responsibility.

Plus I want to prove to DH that it's possible to clear the debts in a fairly reasonably time scale

OP posts:
LadyMuck · 19/02/2009 19:45

I'm not suggesting that you are not responsible. And if you had the same range of rates available to you as if you were employed, and yet still chose to pay 30%, then fair enough. But if you chose 30% because it was the only option available to you because you have childcare responsibilities then that is indirect sex discrimination.

But if you are happy with your status quo then that is great. Hope it goes well.