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During Covid19 pandemic I managed to save some money and I was thinking about repaying some of my debts, however, I'm not sure should I do it, or keep cash just in case things turn for the worse. This is my situation with concerns against repaying each debt.

I have roughly 7000 GBP

I have three debts:

  1. 6500 GBP overdraft (APR 35%)
  2. 2500 GBP PayPal credit (APR 19.9%)
  3. 1600 GBP Amex credit card (APR 23.5%)

I could repay my overdraft, it would save me around 150 GBP each month and I could still use it as if money would be in my bank account in case of a real emergency.

I could repay both PayPal and Amex cards saving around 120 GBP each month and have some money left. My concern is that PayPal Credit and Amex are the least acceptable forms of payment in the UK and in case I would need access to money there is a chance I won't be able to use.

I can just keep the cash and pay interest on all three accounts until crisis is over.

What should i do?

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    I joined specifically to note that if you paid off your overdraft in its entirety (saving you £150/mo), that'll make you £1,800 better off over 12 months which is more than enough to pay off Amex (your next highest APR) assuming you add that on to whatever repayment you're already making. Depending on what that is, you may well even break into the PayPal debt. (I'm not sure this is enough to be an answer, hence adding as a comment =) – Rob Mar 28 at 0:01
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    Your interest rate is really 35%? When the base rate is 0.1% these days? I would think you might do better refinancing, even if it's through your local loan shark. Do they have credit cards with 0% interest balance transfers in Britain? – jamesqf Mar 28 at 3:38
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    @jamesqf Actually, 35% is slightly lower than average, most UK banks charge 40%. The FCA gave banks until the end of March 2020 to stop making fixed overdraft charges - things like £30 to write you a letter saying you are overdrawn + £10 a month. These led to very high marginal rates for people who just dipped briefly into the red. Now the banks just charge high interest rates instead, making them a very bad place to have long term debt. – richardb Mar 28 at 15:20
  • @jamesqf AIUI in the UK a "balance transfer" is from one credit card to another. Some cards do offer "money transfer" deals which could be used to pay off an overdraft, though they tend to have higher fees than regular balance transfers moneysavingexpert.com/credit-cards/money-transfers , some have also suggested taking a cash advance on one card then immediately doing a balance transfer to another card moneysavingexpert.com/team-blog/2016/11/… – Peter Green Mar 28 at 16:58
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    @ZsoltSzilagy Smashing peoples' knees is not nearly as profitable as charging them 35% interest on the debt -- provided they're paying at least the minimum payment. Consider informing those people you know. – mustaccio Mar 28 at 20:30
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Keeping some liquid cash is sensible, but the exorbitant rates on your debt will hurt you long-term. Pay them off as quickly as safely possible.

Since you have high-interest debt, getting rid of that debt is more important than maintaining a large emergency fund. Having both savings and overdraft fees is illogical. However, I understand that you'd rather have cash than paying of other debts if you expect to be laid off soon.

To save the most money, the optimal solution is to pay off the highest-interest debt first. Here, that is the overdraft.

Unless you will also be able to pay off the other debts within a couple of months, it could be sensible to refinance. A small loan for £5000 at 6% over 12 months (~ £440/month) could give you breathing room to pay off all high-interest debts and stabilize your finances – if you are still eligible for such loans.

Aside from affecting job stability, the Covid-19 situation doesn't change a lot. If you've struggled to live without debt pre-Corona, it won't get easier now. That's why it could be helpful to pay off as much as possible now, so that you aren't saddled with endless interest payments in more difficult times: who knows how long this crisis will last? And you need to figure out why you have so much cash and so much debt, but that is out of scope here.

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    The overdraft is pretty darned liquid. There's no reason not to pay off the overdraft immediately and dive back into the overdraft if needed unless there's a fear that once the overdraft is paid they'll rescind it, but that is very unlikely (since I bet they love getting that 35% APR... which omg 35% APR is that even legal!?) – corsiKa Mar 28 at 0:43
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    @corsiKa: Regarding that, OP should ask/demand that the bank remove overdraft funding from their account as long as they have a sufficient line of credit on cards at a slightly less astronomical APR. – R.. GitHub STOP HELPING ICE Mar 28 at 3:38
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    @R..GitHubSTOPHELPINGICE Eh, I wouldn't, you never know when you need it. But certainly, OP needs to exercise proper budgeting to limit how much it gets used. I mean, if OP even GOT a 6,500 pound overdraft, clearly there was at least at some point some serious money coming in. – corsiKa Mar 28 at 3:41
  • @corsiKa My UK credit card had 59% APR. – gerrit Mar 28 at 21:38
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    @corsiKa the UK’s financial regulator changed the rules to prevent differences between Arranged and Unplanned overdraft rates. In effect, most high street banks put them up to 39.9%. I think only one (NatWest) is lower, at 35%. So yes it’s legal, and a bit embarrassing for the financial regulator as their ruling has made matters worse. – Tim Mar 30 at 9:52
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If you are sure they'll let you overdraft your account again, then for Heaven's sake get rid of that ridiculously high APR of 35%. Keep the rest as an emergency fund. 500 GBP is not much, but more than nothing.

Then gradually get rid of the other debts, if only with the 150 GBP/month you just saved. This makes you get rid of the Amex debt in 10 months and the PayPal credit in about 20 more months.

Or even better, get rid of them immediately by refinancing with a lower APR. But this can be only be a temporary solution, the long term solution can only be to pay them off.

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    Change "gradually" to "aggressively" in this answer, IMHO. – Pete B. Mar 27 at 14:32
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    @PeteB. IBTD, because of the low emergency fund. Such a fund can be quite important, and while 23.5% is very high as well and should be paid off very fast, am emergency fund should be built as well ASAP. – glglgl Mar 27 at 14:52
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    @PeteB. +1 for your comment. You either aggressively get rid of the other debts or they will explode real fast. 19.9% and 23.5% rates might be smaller than 35%, but all of them are insanely and dangerously high. A debt with 19.9% APR will double in less than 4 years. – Eric Duminil Mar 28 at 11:17
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    I would say that an interest rate of 35% - or even ~20% - IS an emergency! – jamesqf Mar 30 at 16:21
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I have three debts:

6500 GBP overdraft (APR 35%)

2500 GBP PayPal credit (APR 19.9%)

1600 GBP Amex credit card (APR 23.5%)

I have more debts than you (four of them, not three).

My smallest debt is way larger than your largest debt.

Guess what? None of my debts has more than 3% interest rate.

Get rid of these debts! As soon as possible, I might add. I don't know what you were thinking when getting a debt with >5% interest rate (1). Don't ever do such a thing again!

Getting rid of these is made easier by they being relatively small. My total debt is about 10 times larger than your total debt. The secret to managing debt is: only take debt when you are getting it with a low interest rate and manageable payback period.

Your debt has so ridiculously high interest rate that getting rid of it should be your first priority. You can use the credit card as your emergency fund, so your first priority really should be getting rid of these debts, not setting up an emergency fund.

Then, set up an emergency fund of few months expenses at least.

Then, you can start investing. Stock market yields 8-10% per year. Much less than any of your debts. But I would say, given even a 10% yield will eventually make you rich if you consistently save and invest.

A 20-35% debt, on the other hand, will nearly immediately make you poor unless you can get rid of it very quickly.

(1): Ok, in times of high inflation, even >5% interest rate debt might make sense. But in times of low inflation, it does not.

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    Just curious, aside from home and car loans, where are you getting loans under 5%? I've got great credit, but my credit card company for instance won't loan me money for less than 7% (not that i'm biting). I think if I carried a balance on the card it would be somewhat north of 10%. – Michael Mar 28 at 1:13
  • Home loan (home as collateral), car loan (car as collateral), education loan (non-subsidized but payback to the bank is guaranteed by the government of Finland). All people here can get those loans below 5%. For the fourth and smallest loan I planned to use my forest ownership as collateral, but the bank said it's too much hassle to set up a collateral, and they also said they trust me to pay back the loan, so they gave it without a collateral. – juhist Mar 28 at 6:35
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    So in other words, you were extremely lucky to have access to loans with such a low interest rate, and your incredulity at the misfortune of others to not have such privilege does not lend itself to strengthening your point (unless the point was in fact "be lucky enough to be born in Finland and with the ability to complete university and purchase or inherit significant amounts of land"?) – Nij Mar 29 at 10:39
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    @Nij I think most countries in the Eurozone have similar situation than Finland with respect to interest rates. Also, to get education loan, any education (university or not) qualifies here. So I certainly was not bragging about my university education. In fact, I don't see high loan amount as something to brag about. I am working very hard to reduce my loans. But I do agree, that I certainly am very lucky to be born in Finland! – juhist Mar 29 at 11:29
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    @juhist while I agree that >5% is hard to justify. I think you are coming at this from a very privileged position by assuming that just anyone can discard >5% when searching to borrow money. For example, the audience here is international and not all countries currently enjoy such low interest rates from the central bank (0.1% in UK). But also, for those who have a poor credit history or even no history. You are telling them to never take out any loan at all. I am not convinced this is sound advice. – Culzean Mar 29 at 14:40
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This debt didn't make itself. I am concerned that if you pay down this debt, you'll simply borrow again soon enough, and you'll be right back on the debt treadmill.

Suze Orman used to preach "3-6 month emergency fund" like everyone else. And then in 2008 when the market tanked, all she's said since was "8 month emergency fund".

When you've fallen back onto it, you cut unnecessary expenses, so it pays for rent, food, debt minimum payments etc. Your country's social services may help you.

It sounds like you borrow a lot and having cash-on-hand is fairly unusual, and you haven't thought much about an emergency fund because that seems implausible for you.

I might guess you feel somewhat uncomfortable "just having" this money. We have an expression "burning a hole in your pocket". It's common to have a feeling like you need to spend it on something smart... before you spend it on something stupid. Or, as often "happens", some sort of "emergency" comes up that feels like it can only be cured with money. (the rest of the time, the "emergencies" still happen, but one is inspired to find a cheap way to solve it.)

All that to say, that sense of "use it or lose it" is real and reasonable. But it is due to erroneous thinking about money. If you can think about that nest-egg having a job to do, and can refrain from feeling like it's "burning a hole in your pocket", and can hold yourself back from stupid spending, and solve your "emergencies" in a moneyless way even when you have it... Then I think you have the core of a proper emergency fund.

And when you save for that purpose, it becomes easier to save for other purposes. That opens the path to investing. And now you're using money effectively instead of it using you.

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There is no point whatsoever in hanging on to cash as an "emergency fund". The fact that you have access to a large overdraft and a couple of credit cards gives you a source of funds in an emergency, and gives you even more if you get those paid off. So it always makes more sense to pay off debt than to hold on to money.

Here's what I think you should do.

(1) Pay off that £6500 in its entirety. As soon as you possibly can. Stop using that giant overdraft, but keep it available in case there's a real emergency.

(2) Pay the remaining £500 into the Amex card.

(3) Use your Paypal card to pay off the balance of your Amex card, assuming that £3600 is within your credit limit.

(4) Open a new credit card. Whichever type is the most widely accepted credit card in UK. I'm not in UK so I don't know what this is, but maybe Visa or Mastercard. This will be for your day to day spending. Whenever you want to purchase anything from a merchant who accepts a credit card, and doesn't charge a surcharge for doing so, this is what you'll use. You must make sure that you pay this new credit card off in full by the due date every month, and never use it for a cash advance. That way, you can avoid paying any interest on it whatsoever. And because you get between 3 and 7 weeks of free credit whenever you use this card, this will make it easier to pay off your other debts.

(5) Every time you receive income, figure out how much of it you'll need to retain for expenses on which you can't use a credit card. This might include rent, power, internet, insurance, and a bunch of other things. Pay the difference into your Paypal card. This will enable you to clear the debt on your Paypal card as quickly as possible.

(6) Every time your new credit card falls due, pay off the entire amount, using the Paypal card. If this would make the Paypal card exceed its credit limit, then use the Amex card instead. Never miss the due date on your new card, or pay less than 100% of the balance, otherwise you lose the "interest free" advantage.

(7) Every time you need cash, and you haven't retained enough from your income, use your Paypal card. If this would make the Paypal card exceed its credit limit, then use the Amex card instead. But never use your new credit card for cash advances.

This will be the fastest way to pay off your debts. Once all three credit cards are clear, think again about how much of an emergency fund you really need. Keep whatever credit card(s) you need for this. Destroy the others and close the accounts. Also close the overdraft.

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Liquid cash is also freedom. You could get a sowing machine, order some fabric, and make masks for people to wear for CoViD19 -- If you sell them for a profit (not too much, though) it would be a win-win for both you and those you serve: You help them not to get sick, they help you to get out of debt, and you make yourself part of the solution. A genius country doctor used to ask me every time I went to do him, "so... what are you doing for the good of the world?" I never forgot it. What looks like a problem may actually be an opportunity. Best of luck to you.

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