Best way to distribute lump sum between creditors?

DuskyC

Hello.

I need some advice about the best way to begin improving my credit rating.

I'm 22 and ran up about £10,000 in debt through sheer stupidity. These debts were things like loans, credit cards, payday loans, mobile phone bills etc. Around Christmas 2009 I worked out exactly what I owed, and I got a part-time job as well as my full-time job to start paying some of it off. All the smaller debts have now been paid, and the four that remain, including their balances and the amount I'm paying each month, are as follows:

AA loan (with debt collectors): approx. £2800. Paying £60 a month on a plan, but the monthly payment should be £140.77, so I'm in arrears.

MBNA credit card (sold on): approx. £1700. Paying £60 a month and the account was in arrears, but I think these must be about clear now.

Lloyds TSB overdraft: approx. £1500. Paying £60 a month and this account was also in arrears, which should now be cleared.

Lloyds TSB loan: approx. £700. Paying the agreed £30.26 a month. I have never defaulted on this account so it's healthy.

I'm about to receive £2500 from a personal injury claim and I need to find out what the best thing to do with this would be. I'm thinking the best thing would be to ask for a settlement figure for the AA loan, and see if I can pay it in full, because that account is in arrears as I'm not paying the full monthly repayment. Would this be the best way to have a positive effect on my credit rating?

As the arrears should almost be clear on the credit card and overdraft accounts, will my credit rating start to improve? Or will I have bad credit until the accounts are paid in full?

I applied for a high interest, credit rebuilding credit card to start repairing some of the damage, but I can't even get one of those.

I've ordered a copy of my credit report from Experian, and I'm going to phone my creditors this evening to check the exact balances of each account.

Any advice would be greatly appreciated.

Thanks.

podperson

Would look at offering reduced full and finals to some of the creditors rather then paying off in full. Since several are with debt collectors and in arrears then stand a better chance of getting a reduced amount accepted. Some good threads on the forum that you can read up on for more information but would suggest offering them a low percentage to start with (say 20-30%) and then see what they come back with. Can always up a low offer but can't reduce a high one
Also with the credit card have you had any charges on the account? If so look at claiming these back as could significantly reduce the balance.

undaunted

What you should really do (and have done with your monthly payments too) is to work out what money you have to pay creditors and then divide it pro rata between them (ie AA having a considerably bigger debt should have been getting more & the smaller creditors less)

The idea you seem to imply, that by not defaulting on one Lloyds TSB account and clearing the AA account would each make you a better risk is unlikely to help you much if other accounts have been / are still in arrears.

If however the others are upto date (or soon will be) & you can continue to maintain the subscriptions then I can perhaps see your line of thought in clearing the AA account (one less to worry about & £60 a month freed towards the other accounts?).

Alternatively, you may also wish to consider what interest (if any) you could save by clearing each account (eg clearing any that is still accruing high interest fees first)

DuskyC

podperson wrote: »

Would look at offering reduced full and finals to some of the creditors rather then paying off in full. Since several are with debt collectors and in arrears then stand a better chance of getting a reduced amount accepted. Some good threads on the forum that you can read up on for more information but would suggest offering them a low percentage to start with (say 20-30%) and then see what they come back with. Can always up a low offer but can't reduce a high one
Also with the credit card have you had any charges on the account? If so look at claiming these back as could significantly reduce the balance.

Thanks for the reply.

If I offered full and finals, and these were accepted, would the fact that I'd settled at a lesser amount than the original amount borrowed have a negative impact on my credit rating? I mean I know it's already shot to pieces, but would this just make it worse?

Re the credit card, a lot of the balance is made up of charges. I didn't realise I could claim back credit card charges. I may look into that, thanks.

DuskyC

undaunted wrote: »

What you should really do (and have done with your monthly payments too) is to work out what money you have to pay creditors and then divide it pro rata between them (ie AA having a considerably bigger debt should have been getting more & the smaller creditors less)

The idea you seem to imply, that by not defaulting on one Lloyds TSB account and clearing the AA account would each make you a better risk is unlikely to help you much if other accounts have been / are still in arrears.

If however the others are upto date (or soon will be) & you can continue to maintain the subscriptions then I can perhaps see your line of thought in clearing the AA account (one less to worry about & £60 a month freed towards the other accounts?).

Alternatively, you may also wish to consider what interest (if any) you could save by clearing each account (eg clearing any that is still accruing high interest fees first)

Thanks for replying.

When I initially got a grip and worked out what I owed and what money I had to spare, I did actually divide it up pro-rata. Once I got an additional job and had more money to throw at it all, I upped the payments to £60 each for the big three to make a dent in the arrears, which I believe I have now done.

That is the idea I had, yes. Do you not think clearing the AA account and not having defaulted on the Lloyds loan will make me a better risk, even if the other two accounts are no longer in arrears? Will the fact that they have been in arrears have a long lasting impact?

Thanks for your input; it's very useful.

podperson

If a reduced full and final was accepted your creditor would mark the debt as satisfied on your credit record with a tag of partial. I guess this doesn't look as good as settled in full but settled still looks a lot better then unsettled
If you could say get 50% settlements then for your £2500 you would be able to clear most of the debt, claim the cc charges back as well and will be well on the way to totally clear and then can work on rebuilding your credit rating.

DuskyC

podperson wrote: »

If a reduced full and final was accepted your creditor would mark the debt as satisfied on your credit record with a tag of partial. I guess this doesn't look as good as settled in full but settled still looks a lot better then unsettled
If you could say get 50% settlements then for your £2500 you would be able to clear most of the debt, claim the cc charges back as well and will be well on the way to totally clear and then can work on rebuilding your credit rating.

I see, thanks. I'm going to investigate on MSE how to go about offering full and finals! Just one more question if you don't mind.. as MBNA have sold the account on, can I still reclaim the charges? And could I get a breakdown of the charges from MBNA?

podperson

Yup, since MBNA were the ones who charged you then they would have to refund them. If you don't have your statements send them a subject access request letter, will need to pay £10 for it.

undaunted

DuskyC wrote: »

Thanks for replying.

That is the idea I had, yes. Do you not think clearing the AA account and not having defaulted on the Lloyds loan will make me a better risk, even if the other two accounts are no longer in arrears? Will the fact that they have been in arrears have a long lasting impact?
QUOTE]

There are no black lists or hard and fast rules as such, each lender is free to set their own criteria (hence why some organisations will not lend money to some people whilst others will do so but only at an extortionate interest rate).

However their decisions are influenced by referring to credit reference agencies such as Equifax & Experian. If your account is in arrears, you default on payment, you have CCJ's, you are not on the electoral role at that address etc it is likely to be shown here for other lenders to view, thus one account being okay but another not may still cause you an issue when applying for credit.

You can obtain copies of your file if you wish, may be able to make any corrections if appropriate. Have a look here for basic informations, addresses, web links etc
http://www.ico.gov.uk/for_the_public/topic_specific_guides/credit.aspx