What to do with a small inheritance

H1987

Hey.
in the next week or so I will receive a small in inheritance of about £20,000.
i was planning on paying of debts with hopes it will improve my credit so I can buy a house if a few years but I’m unsure of what steps to take as I have heard paying off a loan early does not impact your credit.

Can people please let me know what are the best debts to pay off first to make a better impact on my credit score? 

My debts are:


£1,300 Sainsbury’s loan
£200 capital one CC
£2,900 Sainsburys CC
£6,000 Sainsbury personal loan
£10,000 trade centre car finance
£2,000 overdraft

sammyjammy

Advice is usually pay the biggest interest rate debt off first, the less debt you have when you purchase a house the better. don't worry about your credit score, its made up and not seen by lenders.

If it were me I would pay off overdraft (and get them to rescue the limit to remove temptation to use it again), pay off the Capital one card first.  Is any of the debt interest free?  If not I'd pay off another £13,000 worth and put £5k in a high interest savings account to jump start your deposit savings.  Up the repayments on whatever is left so you can get rid of it and be debt free in a  few months.

Brie

It would be helpful to know what interest is being charged but I'm guessing that overall the overdraft is costing you the most.  So that first.

Then I'd guess the 2 credit cards so they're next.

Then stop and have a look at why you have been using the cards.  Nothing the matter with using them paying the daily expenses as long as you pay off in full each month.  And stay out of your overdraft.

And then the loans.  Check what the early redemption fees are for each to see if it's worthwhile clearing them.  As you say it's not a problem having loans as long as you are making your payments every month.  But also consider why you have the loans - maybe to clear previous card debt?  These are the sort of things that need to be sorted before considering buying a home as that is a big investment!!

Don't forget that you are the only one that sees the credit score.  Banks look at your credit history so if you have no "urgent" bills like credit cards that are never being paid off in full that shows you are a big risk.  A couple of loans, well managed, are less of a risk.  Take a look too at the other "loans" you have - paying monthly for car insurance or for an overpriced phone package.  The less credit you are using the more credit a bank will be willing to give you and at a better rate - that's what you want to be able to show them when you apply for a mortgage.

I'd also suggest you consider who gave you this inheritance.  Is there something that you would like that could remind you of them?  Maybe you want to get a special bit of jewellery or something nice for your home that when you look at it reminds you of happy times.  Maybe it's a chance to go out to dinner to celebrate their life - off to their favourite Indian restaurant or something.  Or put a nice chunk of this aside in a savings account and take the money you've been paying monthly on the cards in there as well and build it up to a nice down payment.  

CliveOfIndia

To reiterate the previous comments, ignore your score completely.  But in terms of improving your "credit-worthiness" or whatever you want to call it, reducing your outstanding debt will improve your chances of being offered a better mortgage deal, all other things being equal.

So from a purely financial point of view, pay off as much of the debt as you can, prioritising the ones with the highest APR first.

As has already been mentioned, the overdraft should be first on your list.  It's quite likely that this will have a high APR anyway, but regular use of an overdraft is usually viewed pretty negatively by any lender, so get shot of it - and try not to use it again.

The credit cards are likely to be the next-highest APRs (unless you've got a promotional rate running), if that's the case then focus on them.

When it comes to the loans/finance, just check whether there are any early settlement or overpayment penalties.  In all likelihood you'll still save money overall if you can either settle or reduce them - and of course, having less debt when you come to apply for a mortgage will stand you in good stead.

It might be worth looking at what savings account are available.  If you're able to earn more in savings than what you're paying on a loan, then it might make sense to keep the loan running and earn interest on savings.  That's probably an unlikely scenario - and won't make you look as good in the eyes of a lender because you'll still have the loan owing (savings are not taken into account when a lender assesses your credit application).  But just something to think about.

Desmond_Hume

I’d seriously think about dropping that money into a savings account. Have you addressed or identified the root cause issues of the debts? If not, all that’s going to happen is you’ll use the £20K now to pay them off, rack them up again and be in exactly the same position in a few years. With no £20K lump sum that could have been used as a deposit. 

Nasqueron

Desmond_Hume said:

I’d seriously think about dropping that money into a savings account. Have you addressed or identified the root cause issues of the debts? If not, all that’s going to happen is you’ll use the £20K now to pay them off, rack them up again and be in exactly the same position in a few years. With no £20K lump sum that could have been used as a deposit. 

The money could be spent if underlying reasons are not controlled. Better to at least reduce interest payments

CliveOfIndia

Nasqueron said:

Desmond_Hume said:

I’d seriously think about dropping that money into a savings account. Have you addressed or identified the root cause issues of the debts? If not, all that’s going to happen is you’ll use the £20K now to pay them off, rack them up again and be in exactly the same position in a few years. With no £20K lump sum that could have been used as a deposit. 

The money could be spent if underlying reasons are not controlled. Better to at least reduce interest payments

I was actually going to say something very similar.  On the one hand, having a decent chunk set aside for a deposit makes eminent sense.  On the other, it seems daft to be paying interest when you needn't be (unless your savings earn more than you're paying on the debt, which is probably unlikely).

Depends how far in the future the OP is looking to buy a house.  The usual advice is to use the windfall to pay off the debts, then immediately set up a Standing Order from your current account to a savings account, equivalent to what you used to pay on your debt repayments.  The net result is that you end up with even more saved, because you're effectively paying yourself the interest (as well as capital) that you would have been paying to your lender.

The other consideration is that, aside from the actual monetary value of things, your likely to get a better mortgage deal if you have zero debt than if you've got <some> debt.

But you make a very important point - whichever approach is taken, you must address the root cause of the debt above all else, otherwise you'll quickly be back to square one.