Overdraft or credit card? What to pay off first before mortgage application.

MissScotia01

Hello,

We have a MIP in place for buying our next house, our house has just gone on market.  We are using this time to try and pay off as much debt before we buy a new house with a bigger mortgage.  Is it better for us to pay off our overdrafts first or concentrate on taken down the credit card debt?  Partner only has an overdraft of £600 and I have one of £200.  Credit cards are sitting at £4.8k for partner and £1.5k for me.  We have been going into the overdrafts this last few months due to forking out for getting the house sorted for putting on the market and paying off other small debts.  We have a total family salary of £116k so we are comfortable but just want to pay these debts off in the correct order. 

Thanks

fatbelly

There's no correct order. Both are potentially high interest. Here are some tips on the overdraft

https://www.moneysavingexpert.com/banking/cut-overdraft-costs/

And this is what you could look at to help pay off the credit card

https://www.moneysavingexpert.com/credit-cards/balance-transfer-credit-cards/

MissScotia01

Thanks for the links, but we are hoping to pay off everything in the next 3/4 months.  Just wanted to know which would we should prioritise from a mortgage application point of view.

cymruchris

If you had the choice of killing one off before the other, yet eventually killing off both - I'd do the overdraft first.

That's seen as a month by month emergency fund - whereas credit cards, although better to pay off sooner are seen less so.

Using an overdraft looks more like you can't control your finances than a credit card does. (And I don't mean that in any harsh judgemental way - more how I think lenders see it).

MissScotia01

cymruchris said:

If you had the choice of killing one off before the other, yet eventually killing off both - I'd do the overdraft first.

That's seen as a month by month emergency fund - whereas credit cards, although better to pay off sooner are seen less so.

Using an overdraft looks more like you can't control your finances than a credit card does. (And I don't mean that in any harsh judgemental way - more how I think lenders see it).

Thanks for that! That was the way we are swaying but just wanted to see what others thought. 

Fair enough about the credit card comment. We mounted up ours while I was off on maternity for a good few years but working now and blasting through the debt to a clean slate with new house. 

Hoenir

Do you not have any savings at all? The overdrafts would appear insignificant in terms of your annual household income. 

MissScotia01

Not really. Our financial circumstances have changed a lot in the last year or so, as I started work in May 2023 on a good salary and my partner started his new job with a good bump in pay too. So honestly we have been enjoying a lot of disposable money to go do things with our children that we haven’t had for about 7/8 years. 🤷🏻‍♀️ We are paying off these debts and we will be debt free for new house (apart from mortgage) and start savings. ☺️

pjs493

I’d personally get rid of the overdraft first. Many lenders will see use of an overdraft as you living close to the edge of your affordability and having no spare buffer to keep your accounts in the black even by a few pounds. 

A lot of people use credit cards to earn rewards and pay off the balance each month. With your combined salaries, the credit card debts you have are within a reasonable level. So long as you’re borrowing only a fraction of the available credit you have, you won’t look as if you’ve using your credit cards to survive. 

I have an overdraft available on my main current account but I’ve never used it. I use my CC for every day spending and clear the balance every month in order to earn cash back rewards. 

With your combined salaries, your credit card balances aren’t going to necessarily raise any eyebrows with lenders. Resorting to your overdraft might. 

As you’ve said, you’ve both just recently found yourself in your current good financial position, which is set to continue improving. Live frugally for the next few months, pay off the debts and keep a buffer in your current accounts. Save as much as you can. 

Keep your oldest credit card account open, especially if you’ve never missed a payment as the good management of the account will reflect well in your credit report. If you have multiple cards, consider whether it may be a good idea to close some so that it doesn’t look as if you’ve got loads of open credit cards. 

Don’t forget that you’re going to need savings to pay for selling and buying related fees, removals, etc. 

MissScotia01

pjs493 said:

I’d personally get rid of the overdraft first. Many lenders will see use of an overdraft as you living close to the edge of your affordability and having no spare buffer to keep your accounts in the black even by a few pounds. 

A lot of people use credit cards to earn rewards and pay off the balance each month. With your combined salaries, the credit card debts you have are within a reasonable level. So long as you’re borrowing only a fraction of the available credit you have, you won’t look as if you’ve using your credit cards to survive. 

I have an overdraft available on my main current account but I’ve never used it. I use my CC for every day spending and clear the balance every month in order to earn cash back rewards. 

With your combined salaries, your credit card balances aren’t going to necessarily raise any eyebrows with lenders. Resorting to your overdraft might. 

As you’ve said, you’ve both just recently found yourself in your current good financial position, which is set to continue improving. Live frugally for the next few months, pay off the debts and keep a buffer in your current accounts. Save as much as you can. 

Keep your oldest credit card account open, especially if you’ve never missed a payment as the good management of the account will reflect well in your credit report. If you have multiple cards, consider whether it may be a good idea to close some so that it doesn’t look as if you’ve got loads of open credit cards. 

Don’t forget that you’re going to need savings to pay for selling and buying related fees, removals, etc. 

Thankyou so much! This is the kind of information I was looking for. We have now planned to pay both overdrafts off the end of the month completely so we don’t have any at all. And start paying big chunks into our credit cards next month, (can hopefully pay off mine in a oner!) Our mortgage in principle went through with our credit cards balance slightly higher so shouldn’t have an issue on that front. We both just have one credit card each, so don’t have multiple credit card balances. The house is already on market so selling fees are already paid and will pay the buying fees/removals between us both. 😊

BikingBud

Bit of an old fashioned theory but why not clear the debts and then aggressively build a new deposit pot, 40k into  ISA each year and other high interest savings options.

Bringing a larger deposit to the table is the most effective route to reducing your future mortgage outgoings and the interest paid.

Look at some calculators and see how much you would save through life if the mortgage was 100k less.

You've had your splurge now set some realistic spending and savings targets to significantly reduce your outgoings downstream.

MissScotia01

BikingBud said:

Bit of an old fashioned theory but why not clear the debts and then aggressively build a new deposit pot, 40k into  ISA each year and other high interest savings options.

Bringing a larger deposit to the table is the most effective route to reducing your future mortgage outgoings and the interest paid.

Look at some calculators and see how much you would save through life if the mortgage was 100k less.

You've had your splurge now set some realistic spending and savings targets to significantly reduce your outgoings downstream.

We need to move now as we have put it off for many years so waiting is no option plus house is on market currently. Thanks for your viewpoint though.