Improving credit score - what to pay off first

lakeside56

Hello,

I have a less than brilliant credit rating, but my situation has changed recently and I'm now earning a much higher wage and bringing down debts. My credit file only has one "negative" for a single missed payment some years back (which was actually a communication error) but I have quite a lot of borrowing and available credit. I also have a Together mortgage, part of which is unsecured debt.

It's my wish to improve my credit rating so I can consolidate my credit card balances, and existing small loan balance (not the Together balance), into one loan. I currently have £1,000 to pay off of one of my accounts, and wondered where it'd be best to apply this to improve my credit file.

Accounts:
Loan 1 - balance 2,800 monthly payment 240
Loan 2 - balance 23,000 monthly payment 150 (Together mortgage loan on same term as mortgage)
Card 1 - balance 5700 limit 7000
Card 2 - balance 3200 limit 3900
Card 3 - balance 1200 limit 2500
Card 4 - balance 2000 limit 2700

Should I look to reduce the large balance of card 1, or clear the balance of card 3? Does it even make a difference.

Thanks in advance!

S

[Deleted User]

The one with the highest interest rate.

lakeside56

I don't think there's a lot in it with regard to interest rates. They're all awful.

Deleted_User wrote: »

The one with the highest interest rate.

JimmyTheWig

lakeside56 wrote: »

I don't think there's a lot in it with regard to interest rates. They're all awful.

Even if it's not much difference, I'd still go for the highest interest rate first.

Lets say it takes you 3 years to pay them all off and the difference between the highest and lowest interest rate is just 1%.
If you pay that £1000 off the highest interest rate card now, rather than leaving that until the end to pay off, you'll pay an extra £30 in interest.
Not a huge amount in the scheme of things, I agree, but if you saw £30 on the pavement would you cross the road to pick it up? I certainly would. Checking the interest rates has got to be less effort than crossing the road, so why not pay the highest one first?

Dobbibill

Hi lakeside,

I agree with PPs about clearing the highest interest rate first.

The other thing I would do, is as you clear one card, use the payment that would have gone to that, to pay off the next highest APR. It's the snowball method, this link can help you see how it will work long term when all the debts and interest rates are included.

HTH

lakeside56

Thanks for the replies. I understand the logic of paying off the card with the highest interest first and it's the method I'd use if I was looking at long term, but as I wish to consolidate all these cards as soon as possible my prime aim is to discover where I should allocate funds to best increase my chances of being approved for the consolidation loan. For example, what looks worse to a lender - having four cards with active balances, or that one of those balances is almost 6k?

JimmyTheWig

lakeside56 wrote: »

Thanks for the replies. I understand the logic of paying off the card with the highest interest first and it's the method I'd use if I was looking at long term, but as I wish to consolidate all these cards as soon as possible my prime aim is to discover where I should allocate funds to best increase my chances of being approved for the consolidation loan. For example, what looks worse to a lender - having four cards with active balances, or that one of those balances is almost 6k?

I don't think it makes much difference.
I believe the lender will look at total debt and total available credit. And income, of course.

Dobbibill

Hi Lakeside,

From a lenders point of view, I don't know what they would prefer to see in all honesty.

Don't be surprised if your application for a consolidation loan is rejected.
On paper, you have credit of just under £42k of which you are using just shy of £38k, which is approx 90%. The payment you make will make will bring that down to 88%.
To consolidate, you are essentially asking them to increase your borrowing a further £15k or £12k, depending if you are including Loan 1. They won't necessarily ask you to confirm that you are going to pay off the cards/loans with the new loan, but you are asking them to increase your borrowing to in excess of £50k. Also there is no guarantee you will get a better APR for consolidation.

Consolidation rarely works, given that there is no pressure from the lender to close down existing lines of credit, meaning that further borrowing continues on CCs etc.

You may be better to look at a long term solution.

I wish you all the best for whatever option you choose.

mwarby

Also worth considering a consolidation loan for all your none mortgage debts may need security. Think carefully before turning unsecured debts into secured ones

bravotango

Assuming interest rates are the same, then settle card 3.