Credit card debt a good thing?

tinotuna

Hi MSE Forum! Wondering if I could get some people's thoughts on our current situation...

My partner and I are wanting to buy our first home this year (summer/ autumn this year), but we're not sure what to do with our credit card debt. Basically we have £4000 used on a CC with a limit of £8500. The debt is from a balance transfer 0% interest deal 2 years ago.

Couple of things...

The balance transfer deal is set to run out in May, and we're not sure what to do to avoid hurting our mortgage application and/or deposit. Do we...

1) pay off the entire balance (from our house deposit pile) and close the card
2) pay off the entire balance and leave the card open, or
3) balance transfer the lot to a new card (sooner rather than later as to avoid too many credit ref hits too close to a mortgage application + maintain regular repayments to boost credit score)?

I see there are pros and cons to continuing to pay off a CC balance, but also to minimising available credit etc. I think I've read too much on it and I'm a bit bamboozled with unclear/conflicting chat on the matter. So thought I'd write up our exact situation and we what the MSEs think

Oh and one other thing, my partner is going to buy a moped (£1500 approx) and we want to buy an old car (£1000 approx) before applying for a mortgage this year as well. Do you think these should be bought with cash or put on a credit card/car finance?

And one MORE thing, the CC is in my name only, my partner closed her unused CC this month. In terms of a couple's mortgage application, is one persons CC debt seen as a shared debt? Is it beneficial for us both to have credit cards and monthly repayments to boost our mortgage application?

Any advice would be greatly appreciated!

Thrugelmir

Pay the debt off. Even a new balance transfer will incur you fees.

Have you both opened a Help to Buy ISA ?

G_M

tinotuna wrote: »

.....Do we...

1) pay off the entire balance (from our house deposit pile) and close the card No
2) pay off the entire balance and leave the card open, Yes or
3) balance transfer the lot to a new card (sooner rather than later as to avoid too many credit ref hits too close to a mortgage application + maintain regular repayments to boost credit score)? No

................................................................................

tinotuna

Thrugelmir wrote: »

Pay the debt off. Even a new balance transfer will incur you fees.

Have you both opened a Help to Buy ISA ?

Thanks for the reply. We are paying off the remaining balance of the balance tranfer debt each month, so no dent in our credit history for missed payments. I get that the new BT will have a fee, but say it's 3% of £4000, it'll cost us less in the long run than our £620 p/m rent, if if meant leaving the deposit untouched and us moving into our own place sooner.

And yep we both have HTB ISAs getting SO'd £200 each p/m

Also, can I ask why it's better to pay off the outstanding debt in full, which would not be accruing interest (assuming it's on a 0% promo deal CC)?

Thanks for the help both!

G_M

Debt is debt. If applying for more debt (a mortgage) it is better to be debt-free.

Keeping the credit card, with a zero balance, will show that you can manage finance even when you have access to debt, so it can actually help you more than closing the account.

tinotuna

Debt is debt is a fair point...

I've read elsewhere that having access to an absolute ream of credit to use up in one bender could be perceived badly. If I had £8000 I could smash in one day, would that be seen as a high risk?

I've also got another credit card (zero balance) with a limit of £4500 and an overdraft on one of my current accounts, with a OD limit of £1250. Would these numbers work for/against our application do you reckon?

Like I say, I've probably read too much info on this subject, hence the paranoia!

AnotherJoe

Actual money you owe on card = bad, limit on credit card = irrelevant,
money owed on overdraft = bad, overdraft allowance = irrelevant

Thrugelmir

tinotuna wrote: »

I get that the new BT will have a fee, but say it's 3% of £4000, it'll cost us less in the long run than our £620 p/m rent, if if meant leaving the deposit untouched and us moving into our own place sooner.

Lenders will factor debt into affordability calculations and the amount they will lend you. Debt and savings do not sit in separate pots. All that matters is the net of the two.

tinotuna

AnotherJoe wrote: »

Actual money you owe on card = bad, limit on credit card = irrelevant,
money owed on overdraft = bad, overdraft allowance = irrelevant

I now found this on MoneyFacts:

Lenders take into account the amount of outstanding debt you have, and the monthly payments you make, when assessing whether you can afford the mortgage. Worryingly, some lenders may even assess affordability using the potential amount of debt you could have, assuming that you have maximum balances on all your cards and overdrafts, instead of the balances you do have.

Link here: moneyfacts.co. uk/guides/mortgages/improve-your-chances-of-getting-accepted-for-a-mortgage/

See why I am very confused by all this? Can I ask why/how you've come to that conclusion?

Sorry if this reads rudely, but I just want to understand this!

Elfbert

If you're that worried you can always pay off your debt, keep the card, but ask to reduce your limit on it.

My partner and I both have CCs, paid off every month in full, with limits much smaller than we were offered. £800 his, £3,500 mine.

Once you have your mortgage, and if you really wanted to run up new debts (not advisable!) then you can ask to up the limits again.

G_M

for precise answers about how each individual lender assesses affordability and risk, speak to an expert - an independant mortgage broker who spends his professional life looking at mortgages, lenders, and applicants.