Early Planning For Mortgage - A Dilemma...

Hi guys, sorry this is a slightly larger post than usual. I want to improve my credit score to be able to stand a chance of being approved for a mortgage in a few years time. The way I see it, I have 3 options. Here's the story...


I work from home as a contractor in the aviation industry, I’ve been self-employed since May. Approx income £32k p/a before tax.

I have approx £15k debt, spread between 6-7 creditors. I’m currently on a debt management plan (DMP) with Stepchange, paying around £50 a month. Interest has been frozen on all my debts, which is great. So now it’s a very manageable situation financially, and I hardly ever think or worry about my debts any more.

Basically, right now I have a very bad credit score. And I guess this will not improve for all the time I continue to stay on the DMP, because every month all my creditors put a “default” note on my credit file - even though I’m paying them a tiny amount each month, I’m still technically in default, as I haven’t paid them what I’m supposed to.

So the fact that the DMP allows me to manage my debts and pay zero interest is great, but the downside is that whilst I’m on it, I will always be in default with my creditors, and my credit score won’t improve.

Ultimately, right now I don’t really need a good credit score; I don’t want any credit cards or loans or anything, and I live well within my means from my monthly earnings.

However, a few years down the line I will want to get a mortgage with my wife (she is self-employed too, but doesn’t earn a lot - maybe £18k p/a before tax). So the question is this: what do I need to start doing right now that will positively affect my credit score in a few years time?

With this question in mind, it occurs to me that to stay on my DMP is probably the WORST thing I could do. I have been told that ALL bad credit ‘stays on’ (ie. negatively affects) your report for 6 years. So all these monthly default markers on my credit file will take 6 years to clear off my report - but that 6 years only starts ticking AFTER I finish paying them all off! So actually it will take more than 6 years for them to clear, and for my score to improve. If the only reason for me to work on getting a good credit score is to enable me to get a mortgage, then staying on a monthly DMP seems like a bad idea.

A second option would be to apply for a ‘Debt Relief Order’ (DRO)- a form of bankruptcy for people with debts of less than £20k and who match various criteria. If accepted, this would write-off my debts after 12 months. This seems like a scary idea (because of the word ‘bankruptcy’) but actually it seems to make some sense - it would still stay on my credit file for 6 years, but at least the time at which those 6 years started ticking would be 12 months from now (rather than many years from now on the DMP, after I paid off all my debts). The good this about the DRO, of course, is that you write-off all your debts.

The third option would be to just save like crazy and try to pay off all my debts in one hit. I could probably do this within 6-8 months. Most of my creditors would probably accept reduced payments too. The good thing about this option is that it would be the quickest route to improving my credit score, and I wouldn’t have the big black mark of death of the DRO hanging over my credit file. The downside, of course, is that I would have to part with approx £13k.

I should add - I have no interest in the question of what is the right ‘moral’ thing to do here. I am only interested in deciding on the best course of action to take to improve my credit score within as short a space of time as possible, with a view to being approved for a mortgage.

In this endeavour, I think I am going to go for option 3 - pay off my debts as quickly as possible. But if anyone has any thoughts, comments or advice about any of the above, or maybe about something else that I’ve overlooked or haven’t thought about or just plain got wrong, then I would certainly appreciate it.

Thanks everyone.
David

Replies

  • ap1985ap1985 Forumite
    325 Posts
    I myself was on a DMP not so long ago....and like you I researched into many options. However, I decided it was best for me to just save up like crazy and pay my debts off myself (as technically I got myself into that mess)...a year and a half after clearing my debts and closing down my DMP i managed to get a mortgage so happy days...You just have to be disciplined and try save as much as you can...it may be hard but just think of the positives and benefits after.
    :jFinally going to be a homeowner:T
  • Thanks for your reply! I guess that's exactly the kind of thing I need to hear - for people in a similar situation to me on a DMP who clear all their debts, how long does it then take them to get their credit back to a level where they get approved for a mortgage? If it only took you 1.5 years then that's a great job!

  • With this question in mind, it occurs to me that to stay on my DMP is probably the WORST thing I could do. I have been told that ALL bad credit ‘stays on’ (ie. negatively affects) your report for 6 years. So all these monthly default markers on my credit file will take 6 years to clear off my report - but that 6 years only starts ticking AFTER I finish paying them all off! So actually it will take more than 6 years for them to clear, and for my score to improve. If the only reason for me to work on getting a good credit score is to enable me to get a mortgage, then staying on a monthly DMP seems like a bad idea.

    This is NOT correct!

    Although your account is marked as 'Default' each month it is not a new default. The default date is the date that the account was first defaulted... and this is the point at which the 6 year clock starts ticking.

    Continue with your DMP and save if possible as well to clear them quicker. You should also check your credit file to make sure the default dates are correct - ie as far back as possible. And get the creditor to update the report if they are not correct. Once you have the correct dates on there you will know exactly when they will drop off... and as that clock is already ticking for you it will be less than 6 years from now! :beer:
  • Thanks for your reply! I guess that's exactly the kind of thing I need to hear - for people in a similar situation to me on a DMP who clear all their debts, how long does it then take them to get their credit back to a level where they get approved for a mortgage? If it only took you 1.5 years then that's a great job!


    My partner was in a DMP and as soon as the defaults fell off the report she was able to get an Aqua credit card... less than a year later she applied for a Barclaycard and was given a limit over £5k! Roll on 1 year and her credit file is now squeaky clean with good history and we are currently house hunting with a view to taking out an enormous mortgage!
  • Ah... thank you for pointing that out - that is quite an important thing to know!

    I first entered my DMP 2 years ago so I will make doubly sure that the defaults were put on to my credit file at the correct time!
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