Getting ready for next mortgage - question about CC debt

newmortgagenewme

Hello, I have a question regarding getting my finances ready for a potential mortgage application in the near future, 6-12 months from now. 

I am in full-time employment and over the last few years have also operated a small weekend business online as a sole trader. Over those years I used a number of Personal credit cards exclusively for the business in order to improve my cash flow, buy stock, cover expenses, and take advantage of a number of 0% percent balance transfers with a view that after factoring in the transfer fees the business cash holdings would earn an interest in excess of the fees. This has all been bookkept properly and I do the full self assessment every year and do not hit the VAT thresholds. 

I have excellent credit with no history of missed payments and no other debts other than current outstanding mortgage.

The CC debt equates to about 80% of my yearly full-time wage and the sole trader business holds in excess of this amount in cash. 

Overall, across the various different credit cards, there is approximately 3X my full-time wage in available credit limits, which as I understand means that from a lenders’ standpoint I have high exposure. 

As of this year, I’m no longer operating as a sole trader as the market has changed and is not as profitable as it was a few years ago, so my only source of income will be my full-time job, and a bit of savings interest.

Would I’d like to understand from those who have underwriting experience is what would be the best course of action for me in advance of my mortgage?  I’ve come to the following conclusions:

1. Close 70% of my credit cards to reduce exposure. 
2. Pay off all cc debts

Is there any advantage to doing that now as opposed to closer to the time of the mortgage application? I have no issue with doing this, but it would mean that I would lose out on some additional interest as many of the cards still have over 10 months of 0% percent rate on them.

Is it better to show a sharp payoff and closure or steady servicing of the debt?

Nasqueron

2 would be better

Available credit is something that CRAs can't agree on, sometimes it's bad to have lots, sometimes it's good to have the trust of lenders

Brie

There's a third alternative.  Continue to pay on the cards as you've been doing but every month get the credit limit reduced.  This will lessen the exposure while still allowing you to take advantage of any 0% deals you are on.  It also means that your credit report will show the lowering of credit limits over time which may reassure a mortgage provider of your good intentions.  Normally it can take up to 3 months for the changes to be noted on your report hence the need to lower the limits sooner rather than waiting to the last minute to pay off and shut the cards. 

Mark_d

If I were you I'd repay all debts and reduce your credit cards/limits as much as practical.  I have just two credit cards and they're paid off in full each month by direct debit - one Amex and one Visa card for where I can't use Amex.

Nasqueron

Brie said:

There's a third alternative.  Continue to pay on the cards as you've been doing but every month get the credit limit reduced.  This will lessen the exposure while still allowing you to take advantage of any 0% deals you are on.  It also means that your credit report will show the lowering of credit limits over time which may reassure a mortgage provider of your good intentions.  Normally it can take up to 3 months for the changes to be noted on your report hence the need to lower the limits sooner rather than waiting to the last minute to pay off and shut the cards. 

Lowering credit limit can be a bad thing as it indicates the bank could see you as a risk and reducing your exposure, there is no good reason to just start lowering limits manually, especially not every month

newmortgagenewme

Thank you, these are helpful responses. I suppose if lender feels my exposure is too high at point of application I can commit to closing a few accounts?

Nebulous2

I had that situation a few years ago with Nationwide. Had £30k in debt which I was stoozing.  I spoke to them and they told me the amount they would lend to me. Each £10k of debt knocked about £40k off the amount I could borrow. The adviser said I needed to reduce my credit card debt to under £10k. He also said I needed to leave some time for my credit report to be updated, or I would get an automatic decline and would need to appeal with evidence. 

I followed their instructions and my application sailed through.

They had no interest in my credit limits. These have been higher than my income for over 20 years, at times higher than twice my income. That has never been an issue, although I don't regularly apply for credit.