Loan or Credit Card

Chaplinj99

Hello,

So I am recently trying to get debt free as I plan on getting married and I would like to build my credit score as best I can over the next 12 months as I would like to purchase a decent family car after I have had 3 disastrous experiences with my previous cars and never financed a car. 

I budget quite well, put money aside for groceries and the kids each month and am normally left with around £1000-£1200 a month. I currently have a loan at £3000, another at £2000, both finishing in December. I have a credit card at £5100 on a £5400 limit with 17 months 0% left. I know I can get these both paid off before the end of the year but what should I prioritise, the loans or the credit card if I want to improve my credit score? 

I apologise if this has been asked before I just kind of wanted to get my personal scenario across incase my circumstances affected the decision. Thanks in advance

RAS

Your credit score is a fiction that no lender sees or uses. They look at your credit records, have you?

You need to tell us what the APRs are on the loans and whether you can repay early without penalty.

But it may be that what you should be doing is putting that money into a savings fund and buying a decent second hand car rather than taking out finance on a new one that loses loads of value the minute your drive it off the forecourt.

fatbelly

Don't forget this is Debt free wannabe so when you present us with a situation like that we view it as someone in 10k of debt.

That will have its own impact on you moving forward and generally what you should be doing is prioritising overpaying the debt charging you the most interest.

And finding the cheapest way into car ownership/usage

sourcrates

fatbelly said:

Don't forget this is Debt free wannabe so when you present us with a situation like that we view it as someone in 10k of debt.

And finding the cheapest way into car ownership/usage

Which, generally speaking, would not be finance of any description, save your money and buy for cash.

Ideally buy something that has already lost much of its depreciation, and that you can haggle over.

EssexHebridean

Approach it logically. 

The first step is budgeting - it sounds like you are almost there, but be absolutely certain that you are budgeting for everything you spend - not only in the course of a month, but over a full year. So home insurance due in September? Budget now to ensure that by September, you will have sufficient money put aside to purchase the policy without needing credit, (And by "credit" I mean monthly installments too - they nearly all charge extra for that!). Holidays should be being budgeted monthly - not only travel and accommodation, but also spending money and any additional clothes you might need to buy ahead of the trip. If you have to - or are going to want to - spend money on it, make sure it's factored in to your financial planning. You may find either the SOA calculator we recommend (linked in my signature) or the MSE main site budgeting spreadsheet helpful here, as they both prompt you to remember things you may not have thought about.

Step 2 is to work out which of your debts is costing you the most money, and then whether that can be cleared early. If it can, the next thing is to decide whether it's best value to just chip away overpaying a bit each month, or whether you'd do better to save until you can clear it in full and do that. 

Step 3 in your situation is to work out what you plan to do about a car. If you've had bad experiences before, think about why that might have been - for example I won't touch a car from a private seller, as in real terms you have no protection at all if things go wrong immediately after you've purchased. If you want to spent £3000 on a car in 12 months time though, you need to budget for £3000 for the cost of the car, plus your year's insurance, plus any tax costs - divide that total figure by 12 and you know how much money you need to set aside each month between now and then to be able to afford your purchase. Then going forwards, budget one 12th of the cost of your insurance renewal and tax, plus sufficient money to cover MoT and servicing costs, and depreciative costs like tyres, wiper blades, screenwash and keeping the vehicle clean, plus an additional 10% on top of that for contingencies. 

HenryMSingh85

Here are some things you should consider:

1) Consider focusing on your credit card first - it's almost maxed out at 94% utilisation and this could potentially drag down your credit score. I would try to bring this down to 30% as quickly as possible
2) Pay the loans second - they have fixed terms and get cleared by December anyway. So just continue making the required payments until you bring down your credit utilisation and then after that you can throw in extra money at the loans to clear them 
3) since you want to build your credit for financing a car, you also need to ensure a) no missed payments (even on utiliities, as some report to credit agencies) b) dont close the credit card after paying it off keep it open to maintain a good credit age and consider a soft-check credit builder card if you don't already have a low-limit low utilitsation account to boost your profile

fatbelly

Personally I've always bought cars with cash. I daresay I might have used a credit card on the occasions I bought from a dealer - but none ever offered that.

I have bought privately but not for a few years. If using a dealer you can generally get a good idea of how honest they are

I am careful to check as much as I can about the car's history, do an hpi check, and I am quite comfortable having a good poke around them. I cut my teeth on Ford Cortinas in the 1970s/80s.

Never be afraid to walk away if something doesn't add up.

I think the last ones I bought were 5k, 6k and 7k. At that level you should get a good few years of reliable motoring and not lose much

EssexHebridean

I have to say I think encouraging someone who has already accrued debt to add to that debt by financing a car is not really ideal. We have a habit these days of seeing certain debts as "normal" - and indeed some can be, and can even be considered in Martin's own parlance as "good debt" - a mortgage, a loan to cover the costs of education or training, and on some occasions a loan to pay for a vehicle which is essential to get to a place of work. Outside that though, debt is generally best avoided. 

If the OP is determined to get a car "on finance" I would suggest that rather than traditional car finance, and certainly rather than the expensive deals available for brand new cars, they aim for something solid and second hand, and having cleared their current borrowing, aim for a bank loan at as low a rate as possible, and one which allows for overpaying. They should then throw any monthly surplus at that until it is cleared ahead of time to make the borrowing as cheap as possible. Once cleared, immediately start saving money towards a replacement for that vehicle when needed.

MEM62

As very sensibly, advised by others buy a car that you can afford - i.e. with cash.  Don't be naive enough to buy into the theory that more expensive cars are more reliable.

With respect to your current debt, throw all your spare cash at the debt with the highest interest rate.  You will also need a plan to ensure that the CC debt is paid off before the 0% period ends.