Reduce Overdraft or Credit Card Balance?

twicebittennotshy

Hi.

I wasn't sure whether this post belongs here or the mortgage thread, so please forgive me if I've posted in the wrong place.

I'm looking to move home later in the year and need to tidy-up my finances to give me the best chance of being able to obtain a mortgage / reasonable mortgage rate. I have significant CC debts and each month come within a few pounds of my £1200 overdraft limit, and have done so for several years.

I now have an extra £100ish per month available and am not sure whether this is best spent reducing my CC balances or decreasing the extent that I use my OD each month. If I chose to reduce the extent that I use my OD, should I also reduce my OD limit to avoid the possibility of dipping further into it in future?

In short, which is likely to be more of a concern to a lender - £1200 extra on my CCs (which will all be cleared in full from the equity in my current home at the time of sale), or being £1200 overdrawn, which will again be cleared from equity (and the OD facility withdrawn at this point)?

Thanks in advance.

benmcfc

Is it costing you each time you use your OD? £6 or thereabouts?

Are you able to shift a balance onto a new balance transfer card, to put off the interest, decrease your monthly outgoings and thus free up that bit of extra cash to pay off more balance? (The MSE Credit Club will give you an indication as to whether this is possible.)

Neither looks particularly great on a mortgage application. Card utilisation will affect the amount the banks will lend you. For example, the Post Office's affordability checker takes 3% of the total you owe and deducts it from your monthly income. So the balance is impacting the amount they'll lend you in that instance rather than whether they will lend to you or not in the first place.

I get the feeling from what I've seen that having a credit card balance is OK (subject to affordability) but dipping into an overdraft repeatedly would be much more of a red flag, as it suggests a more fundamental issue with monthly income and outgoings.

What's the long term plan? If you cleared the card debts, it would probably mean your overdraft usage is in turn decreased as a result of lower monthly payments to the CC companies.

It all depends on how the numbers fall into the timeline with regards to when you want to buy a house.

ashp_2

As above neither looks good but I would get the overdraft paid off asap. When I applied for my mortgage my credit card was nearly maxed but I had not used my overdraft for a long time and had no issues. Just make sure you factor credit card repayments into affordability.

twicebittennotshy

Thanks Ben.

The arranged OD is a Halifax one, so costs £1 per day that I'm overdrawn. My mortgage payment goes out a few days after payday, so I'm usually into my OD within a week of payday and getting closer to the limit as the month progresses.

The plan is for all remaining debts, CC and OD, to be cleared from equity during the house move. I'll still have enough left for a 20% deposit and will be debt free, other than my new mortgage when moving into the new home, at which point I'll remove my OD facility and close all but one CC with a low limit which will only be used for things like holiday car hire which insist on a CC.

I realise it's a bit of an exercise in turd polishing - my debts will still be the same value in the run-up to my mortgage application whether I focus on the CC or the OD, it's just a question of what I can do to put the best spin on the situation and maximise my chances of a successful application and acceptable interest rate.

MrsTinks

If you are planning on applying for a mortgage you will need a deposit - so do you already have this and if so why not use it to pay off your debts and THEN save?

glentoran99

MrsTinks wrote: »

If you are planning on applying for a mortgage you will need a deposit - so do you already have this and if so why not use it to pay off your debts and THEN save?

Presumably this will be from his equity of the house he is selling