Credit & Future Mortgage Application

sj1982

Hi,


I have an interesting situation for which I am looking for some advice. My wife and I are wanting to purchase a house in the next 4-5 years, which is about the time we need to save for a deposit to buy in London.


I have a good credit score and a reasonable amount of savings thus far, but my wife has a much lower credit score and about £5,000 of debt (store cards, overdrafts etc...).


I'm thinking of taking a £5,000 loan to completely pay off my wife's debt with a two year term so the debt will be completely cleared well before we apply for a mortgage.


My questions are:


1) How much do you think this will improve my wife's credit score? And should we keep the accounts open such as store cards once the balance is paid off?


2) Should I rather use my existing savings to pay off her debts rather than applying for a £5,000 loan? Will the loan impact our ability to get a mortgage in 4-5 years even if its paid off in 2 years?


Many thanks

madvicker

If you are willing to take out a loan to pay off the debt, why don't you, instead pay (£5000/24) ~£210 a month into her debts now?

If her debts are on credit cards, does she have any balance transfer offers available on the cards that she could make use of?

Taking the loan out doesn't make a lot of sense as it will be on your credit history, and helping her to pay off by it off by just paying the £210 to her debts directly will help her history. What you are suggesting is debt consolidation - which only makes sense if you are shuffling debt, not taking out a new credit agreement to pay back existing debt.

1 - Don't worry about the score. It is irrelevant, more important is how the accounts are handled and the history they show. So no missed payments, that kind of thing.

2 - You could pay it off, but doing what I suggest above will help her history more. Either way is unlikely to significantly affect your mortgage application in the future. It's likely to be a positive influence either way as affordability will be higher with no committed debt repayments.

sj1982

Thanks - essentially that is what I am suggesting, debt consolidation. But wouldn't it be more beneficial to pay her debts back quickly to improve her credit score?


And then we can pay back the loan which is on my credit file.

Willing2Learn

Hi sj1982 and welcome to the forum

sj1982 wrote: »

My questions are:


1) How much do you think this will improve my wife's credit score? And should we keep the accounts open such as store cards once the balance is paid off?


2) Should I rather use my existing savings to pay off her debts rather than applying for a £5,000 loan? Will the loan impact our ability to get a mortgage in 4-5 years even if its paid off in 2 years?

1) Don't worry about your score. Your mortgage provider, (or any lender), does not see your score and definitely will not use it. They will assess you and your wife by taking the data in your respective credit files, add it to the data you provide in your application, and score you accordingly against their independent criteria and policies. This is why you should check your three credit files with the three CRAs on a regular basis to ensure that the data held by them is accurate.

2) If I were you, I would get a money transfer card at 0% to pay off the loan, and a balance transfer card at 0% to pay off the cards. This would be far cheaper than getting a loan. Also, take in to account that debt consolidation rarely works and often leads to a doubling of the debt.

Good luck!!

National_Debtline

Hi sj1982 and welcome to MSE,


If you do take out a loan to clear the debts, there are a several of things to consider. One, is that you are then legally liable for the debts, not your wife. Two, you would need to try and understand the reason for the debt, and potentially destroy the cards to prevent it building up again. And three, you will repay more overall. She has possibly already paid/ is paying interest on the debts, and the loan would charge interest on top of that. If you consider using your savings, then you should try and establish what you would lose in the interest on the savings spent, versus what you would pay in the interest charged on the debts.


Credit files are quite complicated documents, your history is constantly influenced by many factors to give you your overall rating. Future lenders do not see the score generated by the credit reference agencies, they only see your history. Your history shows things such as whether or not you are on the electoral role, anyone you have financial associations with and, of course, your financial history. These factors, mixed with your application for credit, will be assessed by the lender's computer to determine if you qualify for credit or not.


The debts will show for 6 years from the date they were settled (assuming they haven't defaulted).


Laura
@natdebtline

madvicker

To re-iterate, the score is made up. The credit history is important, so it's better for her to maintain one or two accounts that she uses and pays off regularly, in full.

It depends on the interest costs of the debt. Debts at 0% should not be paid off in a hurry - your money works better for you elsewhere (stoozing). However, of all the debts you listed the overdraft is the priority to pay off - they are not as bad as payday loans, but lenders tend to view overdraft usage as a sign of inability to manage your money.

You mention you already have savings? Why not use those to pay off the debts? Then however much she is paying per month for debts can go to savings.

Edit: By the way, I say the above assuming that she can manage her money properly. If she can't, then that is why the debt built up in the first place and you need to tackle those reasons first before helping her pay off the debt.

[Deleted User]

Ignore the scores.

Being able to demonstrate good history is key - get a credit card and use and pay it off in full each month is the best thing to do

Also get a mobile phone contract (a SIM-Only is fine)

sj1982

Thanks - The problem is she has defaulted on some obligations in the past. Not her fault, she consolidated the debts with a company who later went bust and the payments weren't being made.


Do defaults stay on your credit history indefinitely?

[Deleted User]

For 6 years.

Willing2Learn

sj1982 wrote: »

The problem is she has defaulted on some obligations in the past. Not her fault, she consolidated the debts with a company who later went bust and the payments weren't being made.

Never pay a company for debt counselling and consolidation as you can get the same service for free. Please see the MSE article "Debt Problems - What to do & where to get help". Within that article you will find a list of debt counselling services that are free.

Why not get your wife to post a thread on 'Debt Free Wannabe' board on MSE? It's very friendly, super supportive, very constructive in finding solutions, and teaches good money management and budgeting skills.

Willing2Learn

Deleted_User wrote: »

For 6 years.

...from the date of default.