Credit Eligibility Stick or Twist?

MoneyMatters80 · 26 May 2013 at 2:07AM

I am hoping to raise something between £3,000 to £5,000 in addition to what I currently have in the bank (£8,000) to spend on a mixture of home improvements and overseas investment.

As I had recently took out a loan of £7,500 to buy a car last October in addition to transfering a credit balance and buying a sofa on a 0% credit deal I took a look at my experian report and found that I'd moved to an average rating from what had always previously been excellent. This now makes me wary of applying for further credit as I'm told that making an unscuccessful application can decrease chances with another application.

As the credit report highlighted my number of credit accounts in addition to usage of credit as 'negative factors' I'm wondering whether I should use most of the £8,000 I have in the bank to pay down and close the accounts of various credit cards and therefore increase my credit rating, and then in a month or two apply for a loan for something like £12,000.

The thing putting me off doing that is that if I can't get that loan at that point at a reasonable rate (say, less than 10% APR) then I've lost the credit I've already got.

Has anybody else been in a similar situation in the past and are in a position to advise? Or even anybody that understands how the banks work their lending rules better than I do?

Assuming it's relevant my current financial commitments are:-

On the positive side
Income £43,000 per annum before tax
£8k in the bank (from an expected 'windfall' earlier this week)

Less Positive
Mortgage currently borrowed at 85% LTV (94k outstanding on house value £110-112k)
Existing unsecured Loan balance of approx £6,500 open for another 2.5 years until it's paid off
About £2,000 still owing and repaying £100 each month via DFS finance agreement
About £6,600 owing on 0% credit card balance transfers due to end this Autum-Winter

I'm 33 years old, full time employed, never missed a repayment in my life and hate paying more interest to the banks than I have to in order to buy the stuff I deem that I 'need'. On my salary I should be comfortable able to devote another £400-500 a month to credit repayments.

Any advice out there people? Repaying that debt only to reborrow in a more structured form is good? Or is it risky that I might not be able to borrow it back again at a reasonable APR?

gb12345 · 26 May 2013 at 5:26AM

You say you can afford £400-500 a month, but the only savings you have are the £8k from a 'windfall' - if you can afford that much each month you should have the money you need saved up already.

You've currently got at least £15k of credit (you aren't 100% clear on this - you say you will pay off various credit cards, but then only give details of one card) and want another £5k, so you will be putting yourself towards 50% credit:salary, which is the (rule of thumb) level that lenders don't like to go over.

Also, you want some of the money for an overseas investment - is the investment really going to make you more than the APR of the loan?

Vikipollard · 26 May 2013 at 8:51PM

You can have £3k saved in 6 months if your guesstimate of how much you can afford to pay towards a loan is correct. Why not just finance your purchases that way?

MoneyMatters80 · 28 May 2013 at 12:00AM

Thanks gb & viki for the replies. In response to questions you've raised:-

gb12345:-
I wish I did have the money saved up. I switched jobs last December and am now getting paid £400 a month more (without any pension being contributed as last place did, a partial driver towards wanting to make investments). Up until now a lot of that cash has been spent on my wife's driving tuition of about £320 per month but she is due to be taking her test soon so that should be a big saving.

You're right I don't have precise figures for the cards at hand, but when doing balance transfers I've always noted the end date of the 0% period and a quick calculation of what the balance should be at that time on £ balance - % for minimum payment (sliding down each month * period). I've got those noted down as £1,415 due October, £2,440 November, £2,400 December. Obviously the current balances will be a bit higher than that as I've still got a number of minimum payments to make.

All that credit at 3% was quite manageable knowing that some personal injury compensation was coming and that I had a spare car to sell. What's new is this investment opportunity. I wish my father-in-law had mentioned the possibility earlier and so I could have planned it in a more structured way; but he didn't and I'll remain very thankful for the opportunity. The investment should grow at about 30% per year hence I'm very keen to finance it. I'm aware I could borrow readily at about 17% APR but would prefer to keep the costs down.

Vikipollard:-
There is always that option. As my investment would grow faster than the loan, I'd prefer not to have to save and go and do it straight away, even if there will be interest charges. Also, if I don't do something about these credit card bills coming before christmas, I'll have to find a way of dealing with them (probably transfer most of it, and partly why I'm floating this post for advice on whether juggling it into a loan would be better). Most of the cash is to invest. The purchases are to get some decent outside storage for my gym equipment, as my one year old is growing up and starting to fiddle with it so I need to get it out of the house for safety. I'd rather pay interest on something that in theory would increase value or saleability of my house than have to get rid of my stuff and join a gym.

Also there's a silly little game here, if I save, then my wife is much more likely to spend extra at tescos or buy a new ipad or something, whilst if the cash isn't in the bank, she tends to be closer to my natural levels of frugalness

So still not sure if by paying off existing debts I'd likely be able to recover this amount or more at a decent rate in the next couple of months. Paying it back feels risky but I'm not sure if constantly switching credit cards would be the way to go. One really useful thing that gb12345 said is that the banks would tend to consider half of annual salary as a natural ceiling. That indicates that most people with good credit histories should be able to borrow half of salary at less than 10% ? I'd hate to pay existing debt off and then not be able to borrow and do the things I'd like to.

gb12345 · 28 May 2013 at 4:19AM

MoneyMatters80 wrote: »

One really useful thing that gb12345 said is that the banks would tend to consider half of annual salary as a natural ceiling.

As I said in my earlier reply, it's only a rule of thumb - there have been people on here recently who claim to have borrowed substantially more than 50% of earnings. At the end of the day, different lenders have different criteria, which they obviously don't publicise.

MoneyMatters80 wrote: »

That indicates that most people with good credit histories should be able to borrow half of salary at less than 10% ?

Possible, possibly not I'm afraid - again, different lenders have different criteria for their ideal borrower that gets their headline rate. You could apply to Lender A and get a rate of < 10%, but could have put the same application to lender B on the same day and got offered 15%+.

MoneyMatters80 · 8 August 2013 at 12:47AM

Just for the benefit of anybody else who may happen across this thread in similar circumstances to myself, I thought I'd post an update.

I did repay what I had outstanding on my credit card, and monitoring my experian score it did indeed head back up to 960 within a couple of months.

I then looked to refinance and found an alternative to a loan that I had overlooked - an offer on my existing credit card to take a money transfer for 8k at 4.9% for 2 years. I took this out whilst at the same time secured 8k with a personal loan at 12% which was a lot higher than I was ideally after but better than nothing - I'll try to repay that ahead of schedule if possible either by overpayment or refinancing.

Did I do the right thing by paying those credit cards down? Probably not as I was switching them at 3% cost annually and probably would have been able to continue doing so. On the plus side though, I know exactly what my repayments will be for the next 3 years until the debt is cleared down and I can be sure I won't be hitting the higher post offer rates on those cards.

Clive_Woody · 8 August 2013 at 10:01AM

MoneyMatters80 wrote: »

The investment should grow at about 30% per year hence I'm very keen to finance it.

Overseas investment returning 30% per year. No disrespect but this sets so many alarm bells ringing. I really hope you have done your homework on this one otherwise you could stand to lose a lot.

You mentioned that your father in law put you on to this. Has he already seen this level of return? Is he an experienced investor?

Experian_company_representative · 8 August 2013 at 12:59PM

The success of any credit applications isn't logged on your credit report, just the fact you applied. Applying for and opening new lines of credit is likely to hit your credit rating for a few months and the only way to really remedy that is by laying off new applications for a while and allowing the new credit agreements to mature a little.

James

Tirian · 8 August 2013 at 1:52PM

Clive_Woody wrote: »

Overseas investment returning 30% per year. No disrespect but this sets so many alarm bells ringing. I really hope you have done your homework on this one otherwise you could stand to lose a lot.

Ditto this.

Of course, don't know the details, but if you do put money into whatever this is then don't leave your brain at the door.

Something like this you should only put in money that you can afford to lose - certainly shouldn't be borrowing to do it. And also don't put everything into it ... if you're looking to make investments, then spread your money around a little.

Credit Eligibility Stick or Twist?

Comments

Confirm your email address to Create Threads and Reply

🚀 Getting Started

Categories

Is this how you want to be seen?

Get our FREE Weekly email full of deals & guides - and it’s spam-free