Putting savings into debts ahead of saving for house deposit?

TristramShandy

Hi guys, not sure if this is in the correct forum as it seems to straddle all topics!

My wife and I have about £13k in debts (with associated poor credit), and £27k in savings (with associated good credit rating). Our goal is to save enough for a deposit on our first flat. Assuming we had no debts, we could probably put £700 per month into savings.

The debts are about a decade old and have been reducing continuously for that decade, but glacially slowly.

My assumption is that we should use the savings to pay off all of the debts immediately (hence posting as a debt-free wannabe!) and then try to rebuild our savings (and slowly improve the worse credit rating). This will increase our chance of getting a decent mortgage in a few years' time when we have a deposit assembled.

Does that sound like the best way forward? Are we missing something clever with balance transfers or other financial products that might be available to the person with good credit?

If this needs to be deleted and reposted elsewhere please let me know!
:):):):):)

fatbelly

Is any interest being charged on the debts? Were they defaulted? Do they still appear on your credit file?

TristramShandy

Thanks for the reply!

The debts are across four cards and an overdraft. So three-quarters of the total amount is at about 25% apr, the overdraft is about 20%. This is why paying it back has been so slow so far!

fatbelly

Ok, so no defaults and high interest.

On the positive side your credit history should be good, as long as there have been no late payments in the past 24 months.

The savings will be getting 3% interest at best. You could try 0% balance transfers and overdraft but every months' delay is costing you about £250 in interest. I'd use your savings to pay off the debt.

kimplus8

Ild go with fatbellys suggestion, he is on the ball with these things.

enthusiasticsaver

I don’t understand? Why do you have £13k of debt when you have £27k of savings especially when the debt is being charged at 20% and 25% and the savings probably practically zero? You mus5 have paid a small fortune in debt interest which makes no sense if you have been managing to save.

TristramShandy

Hi enthusiasticsaver, thanks for the reply. It's because the debts and the savings were accrued separately before we were married. We're now on a mission to get our lives in order and only make good choices from now on!

bobobski

Another way to look at this: because you are able to pay off your debts but currently are not doing so, it's actually costing you money to have savings (see fatbelly's comment). Paying off all your debts will still leave you a large chunk of savings which if necessary could be used in an emergency, so from my perspective it's very clearly the right thing to do. Pay off the debts, then build your savings back up and improve your credit history at the same time. This will also improve your affordability when you do come to buy a property. Good luck!

enthusiasticsaver

OK well then the first thing to know is there is no credit rating for savings. Your credit rating is related to borrowing on loans, credit cards and current accounts so if you have outstanding debts your rating depends on how well these are managed. If you have had them for a while then this could be perceived as bad money management and could affect your credit rating. The worst thing is the interest you are paying on them.

If 75% of your debts are being charged at 25% per annum then you are paying £2437.50 each year in interest. That is HUGE. The other 25% of your debts are being charged at 20% which is £650. So more than £3000 PER YEAR is being paid in interest alone. It is no wonder they are not coming down. I dread to think what you have paid over the last decade. Why have you not sorted it before?

You need to either move them to 0% deals or pay them off if you have the money sat there in savings offering probably a pittance in interest. It will be nowhere near 20 or 25% so it makes no sense to keep savings when you are paying that much interest.

Smodlet

I hope what I have to offer on this subject is not overstepping the mark as the last thing I want is to cause any offence, TristramShandy, but your post resonated with me for the following reason: I understand the reluctance of the partner with savings to "bail out", for want of a more tactful term, the partner with debts. I am a skinflint, OH was a spendthrift when we met and it has taken most of a quarter of a century to adjust his thinking. He will still buy on impulse, given the chance.

Buying a place together is a huge commitment. It is a leap of faith on the part of the person with savings. Only you and your partner know if you are ready for this yet but if you consider, as has been said by far wiser heads than mine, that every, single penny paid in interest is a penny robbed from your savings, I think the answer is clear. It makes no sense to have more than a little debt at 0% if you have more in savings than you have in debt. The only reason to have any debt is to show potential lenders just how good you are with money and keep your credit rating looking good. HTH.