Consolidating debt for credit score?

Emilyh

Between me and my partner, we have around £10k worth of debt across credit cards, store cards and overdrafts. We can keep up with our payments comfortably but have ridiculous interest rates to pay. So we are considering consolidating all of our debts into one loan that would be paid off within 3 years (my partner works for a bank and so can get a good fixed interest rate with a high chance of acceptance).

My question is, is it better for our credit ratings to consolidate the debts into one, or would our credit scores improve more by continuing paying everything separately? It matters to us as our credit scores are not great and we are looking at applying for a mortgage in a few years time (after the loan has been paid off).

enthusiasticsaver

I don't think taking another loan out will improve your credit score.

Credit scores are improved by paying the debts off regularly and on time. Tackle the most expensive first, do a spending diary to see where you are overspending and budget and save. You will need to be saving for a mortgage anyway.

You can do an soa for specific advice.

Consolidation is frowned upon and generally does not work in helping people repay their debt. It just moves the debt and does not repay it. It does not tackle the root cause of the debt and many people go on to use credit cards and overdrafts again even after the loan is taken out so before long the debt is £20k instead of £10k.

The only exception to this is if your partner is really able to get a low interest loan which if he has a bad credit score may not be the case anyway. I would imagine even staff have to go through scoring. In fact when I worked in a bank many moons ago they were tougher on staff finances than customers as they did not want staff who mismanaged their finances to have access to cash in tills etc. We weren't even allowed overdrafts and going overdrawn was a disciplinary offence. It may be different now. If you go this way make sure you cancel the cards except for 1 and repay the overdrafts and remove them to avoid the temptation to overspend again.

Pixie5740

Emilyh wrote: »

Between me and my partner, we have around £10k worth of debt across credit cards, store cards and overdrafts. We can keep up with our payments comfortably but have ridiculous interest rates to pay. So we are considering consolidating all of our debts into one loan that would be paid off within 3 years (my partner works for a bank and so can get a good fixed interest rate with a high chance of acceptance).

My question is, is it better for our credit ratings to consolidate the debts into one, or would our credit scores improve more by continuing paying everything separately? It matters to us as our credit scores are not great and we are looking at applying for a mortgage in a few years time (after the loan has been paid off).

Which credit scores are you referring to? There's no such thing as a universal credit score and no lender uses the scores generated by the credit reference agencies.

https://www.moneysavingexpert.com/loans/credit-rating-credit-score

The amount you owe is the amount you owe. It doesn't matter whether you owe the money to one lender or a dozen lenders. What is important is to pay the least amount of interest possible and that doesn't just mean get the lowest APR you can as you need to take into account the term as well in order to calculate the total of cost of the debt(s). It is also important to understand how you ended up in debt in the first place. Accruing debt renovating your home is one thing, living beyond your means is another.

DCFC79

Emilyh wrote: »

Between me and my partner, we have around £10k worth of debt across credit cards, store cards and overdrafts. We can keep up with our payments comfortably but have ridiculous interest rates to pay. So we are considering consolidating all of our debts into one loan that would be paid off within 3 years (my partner works for a bank and so can get a good fixed interest rate with a high chance of acceptance).

My question is, is it better for our credit ratings to consolidate the debts into one, or would our credit scores improve more by continuing paying everything separately? It matters to us as our credit scores are not great and we are looking at applying for a mortgage in a few years time (after the loan has been paid off).

I take it you didn't watch Martin's show on ITV the other week ?

He covered credit ratings.

Basically your credit score/rating aren't even seen by lenders, not even the pope, only you can see the rating/score. Lenders see your credit history, your partner should know that.

Consolidation is only worth doing if you don't respend on the store /credit cards so you should close the accounts and cut the cards up. Not taking out more credit would also set your repayment date back.

Have you considered looking at cutting your spending ?

dealer_wins

The danger with consolodating is that within a year you will have built up even more debt by re-using your cards and overdraft.

Best to go to the debt free wanabe board and post, and make as many savings on your outgoings as possible.

Emilyh

Thanks everyone for your advice. Basically, the interest on the loan will be cheaper than paying the interest on the individual cards. I understand what you are saying about credit scores now. So to put it simply.. are we more likely to get accepted for a mortgage having paid off one big consolidation loan, or if we have kept on top of paying off many smaller cards?
P.S. our debt was accrued whilst we were both university students, now we are both in work we can afford to get the debt paid off

System

Makes no difference. What matters is the total amount of debt you have, not to how many people it is owed, your debt:income ratio and any missed/late payments. You've already got payment history with the smaller cards. The number of paid off loans/cards won't matter.

The Consolidation Loan is a good idea but only if you get rid of the cards you used to get into trouble in the first place AND do not get into the mindset that you now have extra free money you can spend but instead use that money to build an emergency fund. I would then get one credit card, one with cashback, and have a low limit on it. Use that to benefit from Section 75 protection and set a direct debit to clear the balance in full every bill and earn a bit of cash from it.

DCFC79

Emilyh wrote: »

Thanks everyone for your advice. Basically, the interest on the loan will be cheaper than paying the interest on the individual cards. I understand what you are saying about credit scores now. So to put it simply.. are we more likely to get accepted for a mortgage having paid off one big consolidation loan, or if we have kept on top of paying off many smaller cards?
P.S. our debt was accrued whilst we were both university students, now we are both in work we can afford to get the debt paid off

No harm in seeing what rate you would get offered by a lender, not necessarily where your partner works.

Dobbibill

Rather than putting it all into one loan - have you considered MT or BT credit cards.

A MT card could be used to pay off overdraft(s) and/or store card - depending which is the higher cost in interest.

Then possibly BT some of the CC debt, so although you still owe many lenders it is at a cheaper rate.

You say you can comfortably afford the payment so this will give you an opportunity to overpay on the highest interest bearing debt first.
There's no reason why you both can't apply to hopefully get more of the debt on a zero % offer.

If it's all in one loan, it's all at the same rate.

PS - posting a SOA in the DFW board is a good idea - the good members may even find you can make savings where you never thought of.