Pay off Interest-Acruing Loan, or Reduce Available Credit?

Smedders11

Hi all,

I'm a first-time buyer looking at getting a mortgage within twelve months of so (possibly applying in about six). My wife and I are pretty savvy with our finances and as a result we've got a pretty low credit score (Callcredit) due to us moving current accounts, debts and the like relatively frequently (we're also linked financially, and my wife has a default on a phone bill on her file from when she was 18, which expires next year). I know that credit scores by themselves are pretty limited in their information, but we're still looking to improve how lenders may look at use anyway when we come for a mortgage.

Our situation is as follows:

MBNA credit card: 0% current account transfer, used to pay off student overdraft and provide a convenient means of paying it off each month. Current balance £1,150, £125 per month.

Barclaycard: 0% purchases card, used for car insurance and high one-off payments. Balance £900, £100 per month.

First Direct: Personal loan, £6,000 re-financed car at 4%. £140 per month (overpayed).

We're wondering which to pay off quickest with surplus income. I know that financially, it makes sense to pay off the car loan because it's the only credit with interest. On the other hand however, we're wondering if it might be better to focus on the credit cards and get each of them paid off in a about six months. The thinking being that paying off the credit cards would reduce our available credit, which might look more favourable to a lender as opposed to having more debt, even if it's affordable and managed. I realise that the the amounts we're talking about, and the time frame, are relatively small in terms of finance, but considering we might apply for a mortgage in half a year we want to improve the snapshot they'll take off our credit situation to get the best rate possible. But perhaps the timeframes and amounts we're talking is too small, and the impact on our credit score/lender's opinion too small, and so should just funnel funds into overpaying our car loan?

Or, would this suggestion be more appropriate:

mwarby wrote: »

Another option is to save the money to increase your deposit, the lower LTV the better you look risk wise and the more options you'll have

CLAPTON

8,000 of debt isn't small

Smedders11

CLAPTON wrote: »

8,000 of debt isn't small

Considering £6,000 is secured against the car, it ain't too bad. In any case, not the advice I was looking for, because I was talking about paying off the two credit cards, and not getting rid of all the debt.

mwarby

Another option is to save the money to increase your deposit, the lower LTV the better you look risk wise and the more options you'll have

CLAPTON

Smedders11 wrote: »

Considering £6,000 is secured against the car, it ain't too bad. In any case, not the advice I was looking for, because I was talking about paying off the two credit cards, and not getting rid of all the debt.

A debt secured against a car is a debt.

Anyway, when you apply for a mortgage the lender will view it as a debt and it will form part of their affordability criteria (just like the credit cards)

Smedders11

Was an option I'd considered, completely forgot to include it!

Smedders11

CLAPTON wrote: »

A debt secured against a car is a debt.

Anyway, when you apply for a mortgage the lender will view it as a debt and it will form part of their affordability criteria (just like the credit cards)

But I could potentially get the credit cards paid off before applying for a mortgage. I'm wondering whether getting the total debt reduced is more important in the short time as opposed to saving myself money in the long-term on the personal loan.

When a lender takes a snapshot, how much of a difference would there be between debt of £6000 and a debt of £8000? Plus, getting rid of the credit cards gets down my available credit, which may also look more favourably on me?

CLAPTON

Smedders11 wrote: »

But I could potentially get the credit cards paid off before applying for a mortgage. I'm wondering whether getting the total debt reduced is more important in the short time as opposed to saving myself money in the long-term on the personal loan.

a few mortgage lender have 'affordability' calculators on their web sites that allow you to put in your debts and deposit

maybe try playing with them to see if higher deposit plus debt is better or worse than, lower deposit and lower debts

yoshiyella

Smedders11 wrote: »

But I could potentially get the credit cards paid off before applying for a mortgage. I'm wondering whether getting the total debt reduced is more important in the short time as opposed to saving myself money in the long-term on the personal loan.

When a lender takes a snapshot, how much of a difference would there be between debt of £6000 and a debt of £8000? Plus, getting rid of the credit cards gets down my available credit, which may also look more favourably on me?

But if you overpay on the car loan then the overall debt still goes down by the same amount as if you were overpaying on the credit cards and reducing the interest you pay - surely win-win?