Published on September 11th, 2012 | by Pete1
Reward Yourself for Your Mental Discipline, Not the Banks.
You may have read a recent post about a trip I went on with my wife, to our mortgage providers, Nationwide. I won’t go all over the details again (you can read these for yourself in the original post) at (http://www.moneysuperstar.co.uk/personal/chickens-home-to-roost-mortgage-reality-check/). The basic message from our smiley mortgage consultant was that we shouldn’t bother darkening his door again until I was debt free. Fair point really, and so we left with that as the main goal.
The most troublesome debt I have is £10,200 spread over two credit cards. The smiley mortgage advisor (also called Peter – I liked him immensely) suggested I take out a consolidation loan to clear this debt over four or five years. He expressed concerns that the debt would not be paid off in a timely manner, as I am currently paying only the minimum. I did explain that I was planning to start ‘topping up’ these repayments, as both credit cards are 0% balance transfer jobbers – all of my repayments are reducing the debt with no interest being added.
Peter gave me a knowing smile / nod (I imagine he hears this a lot). He looked at me in a kind of ‘from one Peter to another way’, and gently suggested that despite my best intentions, I wouldn’t stick to this goal. He showed me a number of loan options that Nationwide could offer me, some with interest rates as low as 7.8%. However, it did seem that borrowing this money would cost me about £1,350 in interest over the term of the loan. The plus side of course, was that I would have a date when all the debt would be cleared, rather than the open ended situation I was currently in. I told Peter that I would like to shop around to see what other rates I could get (he was proud of me at this point, I could tell). He confidently told me that Nationwide would match any APR rates I found elsewhere, so I should take my results to him. We thanked him for his time, and I took his card. As we left and I went back to work, I was left with two thoughts. One, I would search online that night to find a loan as it was clear it would otherwise impact on our ability to move up the property ladder, and two, Peter from Nationwide was a thoroughly nice chap.
Later that day I did indeed do some online research, and found some slightly better rates. I had already decided that I wanted to pay the debt off over four years rather than five. I already have a Nationwide loan that ends in four years, and ideally I’d like all my debt to be repaid by the same time (2016). Basically, the loans I found involved me paying approximately £1,200 to the lender over the term of the loan. I was moaning about this to my wife and brother, when my wife made an excellent point (please don’t tell her I said this, she’ll be all smug for weeks). She suggested that I simply work out how much I would need to pay a month on my credit cards, to pay them off in the four year target, and then increase my monthly payments to that amount. I’d be achieving the same goal as I would had I taken out the loan (i.e. paying off the debt in four years) but I’d be over one thousand pounds better off.
This approach obviously has some complications. Firstly, as already mentioned, my credit cards are 0% balance transfer cards, and I have not used them for purchases. This is fine, up to the point the 0% period comes to an end. At this point (April 2013 for my Virgin credit card, and May 2014 for my Halifax credit card) I would need to arrange another balance transfer to a new credit card, to avoid paying interest on my debt. At this point, I will be charged a small handling fee (normally about 1%). This will slightly increase my debt, and I will then need to recalculate my monthly repayments in order to still hit my four year repayment target.
Secondly, I needed to increase my monthly repayments on my credit cards. For my Halifax card, this was easy. I phoned them up and asked them to increase my monthly payment, which they did. All sorted within 5 minutes. Virgin were a slightly different a story. I tried to increase my payment online, but was presented with only two options, paying off the minimum amount, or the entire balance. I thought this was odd, and so phoned them up to make my request. The chap on the other end of the phone told me that they have stopped offering the service of modifying your monthly payment to a set amount, as some people were setting this lower than their minimum payments, and then incurring fines. I explained my situation, and that this would not occur in my case, but alas, there was no flexibility. He did tell me that I could make ad hoc payments online, which is what I realised I would have to do. This makes things a bit trickier, as it will need extra motivation and discipline to make an extra payment every month, but I’m confident that I have been sufficiently motivated by Peter from Nationwide.
Thirdly, as I had increased my monthly repayments on my credit cards, there will be less disposable income available to me. I can manage with the new repayments, but it will be a bit tighter. I needed to up my Virgin payment from £67 to £140 and my Halifax payment from £35 to £78. This means that in total, my payments go up from £102 to £218, over twice as much. This is going to be tricky, but then if I had taken the loan from a bank, because of the interest I would have been paying £238 a month. Why should the bank get the extra £20 a month? I’m the one making the sacrifices, so surely I should be rewarded, not the banks?! It dawned on me that consolidation loans basically reward the banks for babysitting you. If you are working hard to pay off debts in a disciplined way, make sure you get any spare money, not the banks. Financial discipline is hard, especially if you are breaking bad money habits or trying to repair past mistakes, so make sure you get any available rewards!
Peter from Nationwide is a nice man, and I think he would secretly be prouder of me (and you) for doing it our way, on our terms.