How to make the most of a windfall and handle my last bits of debt

Ashdown

Hello all,

I have recently reduced my debt from a terrifying £45k or thereabouts. It built up over nearly ten years worth of commission-based working, unsuccessful self-employment and illness. It then started to feed on itself and grow, like no-one warns you it can, so I ended up going backwards every month to service existing debt and pay my bills (or "operate" as I call it).

Two weeks ago I received a lifeline in the form of an insurance payout, which has cleared most of it. I am now down to the last £15K of debts which comprises the following;

LOANS
£4k at 46.2% APR with George Banco
£7k at 20% APR with Lloyds

CREDIT CARDS
£2k with Barclaycard Platinum at 19%
£1.5k with HSBC at 19%

I cannot afford to clear it all and I would be hugely grateful for some thoughts on the most intelligent way to reduce and clear these debts. I have worked out two plans based on the fact I now have a regular salary that will pay my way, no overdraft and £13k in savings:

1. Pay off Lloyds which takes £300 each month. Wait a few months then apply for a consolidation loan for the other accounts at a much lower rate.
2. Pay off George Banco and both cards which combined cost about £300. Stick with Lloyds and re-apply at a much lower rate after a few good months.

I would be very grateful for thoughts and advice. I have never been solvent before so I do not know how to do it!

Many thanks,

Ash

enthusiasticsaver

How much disposable income do you have each month to go towards debts?

Are you living within your income now and do you have a proper budget? Try doing an soa on here to get advice on reducing outgoings.

All the rates you are paying are really high, in particular the George Banco one so unless you can move that to a lower rate I would focus on that one. Have you defaulted on these debts and what is your credit record like?

lessonlearned

I would suggest using some of your savings to clear the debts with highest interest so definitely the George Banco.

Maybe the lloyds one too???

I would keep a couple of grand back for emergencies and then look at trying to lower the interest rates on the two credit cards. 0 per cent if you can or low life of balance transfers.

You should then be clear in no time.

Edited to say.......definitely look at the bigger picture to avoid getting into debt again. So soa, spending diary etc. And get a good budget set up.

MrsTinks

Use the Snowball calculator - it allows you to enter one off payments and will tell you how best to attack this

http://www.stoozing.com/calculator/snowball-calculator.php

WestonDave

If you've got 13k in savings which is likely earning very little, it would seem better to use this against debts. Obviously that leaves the question of emergencies etc so I think assuming there is no immediate need for the savings and on the basis that the more you pay off the more monthly income you release to rebuild, I would clear the two bank loans and possibly some of the credit cards. I would imagine that if you have credit limits on the cards you could re- use them if needed in an absolute emergency (freeze in a block of ice etc!) but with the released income from the two loans you should be able to clear the remainder and rebuild savings if you are really focussed. Obviously if you know your car is going to need replacing next month a different strategy will be needed.

Ashdown

Thank you all for your replies.

I am hoping to be a bit tactical about this last bit of debt. Essentially my credit rating is currently 765 ('fair') and I need to rent a flat in March, so I want to improve that as much as possible to pass references. I'm also determined to have at least a £5k cushion against future expenses, problems, rainy days etc, something I have never had before. That is really the underlying reason for a lot of my debt.

Would it be better to have one live bank loan, or a smaller loan and two credit cards (not maxed)?

Once I've moved I'll aim to apply for much lower rates of interest on whatever remains. I've never defaulted on anything, but as I was in a lot of debt at the time, my Lloyds loan is an eye-watering 29%!!

Many thanks.

MrsTinks

It would be better to not have too many credit applications in the last 3 months usually - how much these might affect a credit check for a flat I don't know. It's a VERY long time since I worked in lettings and I expect times have changed.

It may be a bit close to re-jig - as in for a while there is a good chance the new debts will show up on your file, but the old ones haven't been marked as settled or closed yet... It's not uncommon that once they are settled the creditors get a little... slack shall we say in updating the status on the credit files.

Ashdown

Thank you Mrs Tinks. I'm not going to make any credit applications until my credit rating has improved. I used to be £4,000 in overdraft with Lloyds and now I am staying at least £5,000 in credit, so I'm hoping my rating will improve.

My question really is which things I should pay off to maximise the positive impact on my credit file. I'm planning to go through Experian after 1 February to make sure my former lenders have taken their loans off my file.

So, essentially do I shut a £4,000 loan and two credit cards, or do I shut down a £7,000 bank loan? I cannot do both.

Many thanks!

MrsTinks

In that instance I don't think it will make a huge difference and I would go for the highest apr in all honesty Being £5k in credit will not have ANY impact that I'm aware of. Sorry.

My current account and savings don't even show in my credit file...

As in current shows 0 when I'm in credit, my savings doesn't show at all.

I do agree you should have a safety net - £5k might be more than I think is needed but that's your choice

Settling EITHER will however not be likely to be updated on your file before you rent unless you are fairly lucky and they are on top of it...

angelpye

Are you saying you have £600 per month towards debt repayments? If so and if it was me, I am a total novice, my instincts would be to pay expensive loan and cards off and then use the £600 a month to pay down the outstanding loan plus any other monies you could spare through tight budgeting...that could take loan down to nearer £5.5k. I would also act as soon as possible and ask companies to ensure credit file updated asap.

Goodluck and congratulations on your windfall...looks like things are really on the up. Having been debt free twice and stumbled back into debt twice I would suggest really looking into your budget and spending patterns. Its easy to slip back when in the all clear.

enthusiasticsaver

Ashdown wrote: »

Thank you all for your replies.

I am hoping to be a bit tactical about this last bit of debt. Essentially my credit rating is currently 765 ('fair') and I need to rent a flat in March, so I want to improve that as much as possible to pass references. I'm also determined to have at least a £5k cushion against future expenses, problems, rainy days etc, something I have never had before. That is really the underlying reason for a lot of my debt.

Would it be better to have one live bank loan, or a smaller loan and two credit cards (not maxed)?

Once I've moved I'll aim to apply for much lower rates of interest on whatever remains. I've never defaulted on anything, but as I was in a lot of debt at the time, my Lloyds loan is an eye-watering 29%!!

Many thanks.

Having a buffer for emergencies is sensible but paying 20-46% interest on debt whilst having £13k in savings earning low interest rates is crazy. Having bank loans and credit cards outstanding does not help your credit rating.