Clearing Overdraft VS Money Management

BaHu67 · 18 October 2018 at 6:42PM

Hi all,

First post (hopefully of many). I need some advice with regard to my overdraft (£2500) which I have lived in since getting it in 2014.

I have other debts which I am working hard to clear.

My question is - should I work to reduce and clear this overdraft, or will having the overdraft available and not used (if I can get better with budgeting, self control and not people pleasing) be more beneficial for my credit rating and potential future mortgage application?

Thank you in advance.

fatbelly · 18 October 2018 at 8:13PM

You need to get debt-free. You could post a statement of affairs and we can then make intelligent comments, hopefully.

http://www.stoozing.com/calculator/soa.php

As for the overdraft specifically, and that's likely to be expensive debt, Martin has a guide here

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

BaHu67 · 18 October 2018 at 9:03PM

Hi Fatbelly,

Having taken a look at the SOA, I have difficulties in knowing how best to complete this due to fluctuating monthly costs. I will have a think about this, and when I have more time I will analyse my bank statements to advise further.

In short, my debt current consists of;

- Credit Card - £450 limit - limit reached each month however always paid in full so the expensive APR charges do not apply.
- Pay Day Loan 1 - £96 - due to complete at the end of this month
- Pay Day Loan 2 - £446 - due to complete 28/02/2019
- Debt Collector 1 - £519.95 - Making payments of £100 per month.
- Debt Collector 2 - £563.26 (no longer appears on credit file - making a token payment of £20 per month)
- Debt Collector 3 - £139.19 (no longer appears on credit file - making a token payment of £20 per month)
- Lloyds Overdraft - £2500 - Charges currently frozen whilst I get my finances in order. Will return to approx £130 per month once account is defrosted (!).

My current priority, albeit not necessarily right (please advise!) is to clear my debts that are having the biggest impact on my credit score, which currently fluctuates between very poor and poor.

I've had my 'lightbulb moment'. I will never take out another pay day loan. I will no longer default on payments, I am in frequent communication with providers that I owe money to.

I have around £200 per month available to clear debt which does not include the pay day loans. This will increase in January once christmas, as well as a lot of pre planned events are over. (I know I need to start saying No).

Should I clear my non-overdraft debts first, and then almost use my current account as a savings account so the overdraft still exists, but I am not in it. Or should I be working to physically reduce the amount of overdraft available to me?

Your advice on this matter would be hugely appreciated!

FTBuyerGlasgow · 18 October 2018 at 9:05PM

I was in a similar situation, £3k overdraft, right to the bottom of it two weeks before the end of every month.

I was lucky enough to get accepted for a Money Transfer Card from Virgin.

I transferred in £3k, paid a 4% transfer fee (so £120) and set up a direct debit to pay off the card within the promotion period. I think I got it interest free for 31 months, so was saving about £60 a month in overdraft usage and interest every month.

No brainer.

BaHu67 · 18 October 2018 at 9:21PM

Hi FTBuyerGlasgow,

Unfortunately due to my poor financial management over the years, a credit option like you were able to obtain is not a possibility for me, due to my poor credit score.

I am genuinely glad to hear that you were able to get out of your overdraft cycle and hope I can say the same in the months to come.

fatbelly · 18 October 2018 at 10:34PM

BaHu67 wrote: »

- Credit Card - £450 limit - limit reached each month however always paid in full so the expensive APR charges do not apply.
- Pay Day Loan 1 - £96 - due to complete at the end of this month
- Pay Day Loan 2 - £446 - due to complete 28/02/2019
- Debt Collector 1 - £519.95 - Making payments of £100 per month.
- Debt Collector 2 - £563.26 (no longer appears on credit file - making a token payment of £20 per month)
- Debt Collector 3 - £139.19 (no longer appears on credit file - making a token payment of £20 per month)
- Lloyds Overdraft - £2500 - Charges currently frozen whilst I get my finances in order. Will return to approx £130 per month once account is defrosted (!).

To start with, stop worrying about your 'score' - it's just a made-up number to sell you product.

Let's get rid of your debts. You do not carry any credit card debt month-to--month, so that's good.

You have 3 debts with DCAs. Is interest frozen on them? If so, just keep paying the agreed amounts (maybe reduce DC1)

The concerns are the payday loans, which I would clear first.*

Then the overdraft, using as much as you can from that article by Martin.

If you hit this hard for a year you can probably start thinking about saving for your deposit.

* Have a read of this and think if you can claim anything

https://debtcamel.co.uk/payday-loan-refunds/

enthusiasticsaver · 19 October 2018 at 8:37AM

I agree with fat belly. The payday loans are an issue and will impact on any mortgage application. The overdraft is also an expensive way of borrowing normally although I see Lloyds have frozen the charges for now. Paying off your credit card in full each month is a definite positive and shows a certain amount of money discipline so that is good.

It looks like you have made arrangements with debt collectors and payday loans so I would now focus on using any spare money to reduce the overdraft before those extortionate charges go back on.

Forget about mortgage applications or credit scores as your record will be damaged for a few years yet. Focus on clearing the debt and saving. If you have erratic monthly income do you have any emergency savings? That is a must. You will also need substantial savings to buy a house to cover deposit and legal fees so when the debt is gone maybe look into HTB or LISA but one step at a time.

enthusiasticsaver · 19 October 2018 at 8:40AM

Once the overdraft is cleared reduce the limit so you are not tempted to go into it again. Having a small limit to save expensive mistakes if you miscalculate but once you start thinking of overdrafts as money you can spend you are straying into dangerous territory.

Fireflyaway · 19 October 2018 at 7:11PM

I had a long chat with my bank and an independent mortgage advisor as my credit report is not good. Like you I'm trying to improve my behaviour. Both of the people I spoke with said that an overdraft isn't seen as too bad. It's the payday loans and credit cards that are looked at more close in terms of how much available credit you use and if payments are on time.
My plan is to pay off loans and cards and then tackle my overdraft. Personally I plan to get rid of the overdraft so I'm not tempted ( you might be more disciplined!). Any available credit will be taken into account when a mortgage offer is made so you might be offered slightly more with no available overdraft.

BaHu67 · 12 February 2019 at 5:09PM

Thank you all for your support last year. I am really pleased to say that I have now cleared a lot of this debt, I have saved £1k and I am on track to be completely debt free by 1st June 2019.

As of 1st July I will be in the fortunate position to be able to save £800-£1000 per month. I wanted some advice on where best to keep my savings and what my next steps should be in terms of saving for a house deposit. I have opened a LISA and my priority will be to fill this to the £4k maximum.

I appreciate the damage to my credit file has already been done. 3 defaults that won't be dropping off for another 4 years and a history of repeated payday loans over a three year period isn't exactly attractive. However I would like to get opinions on how long it is likely to be until I can get a mortgage at a fairly decent rate.

Thank you again.

EssexHebridean · 12 February 2019 at 5:17PM

Well done, that's great news!

Good thinking to open a LISA for savings - although be cautious of saving too much until the debt is cleared - better to be debt free and to be able to save your surplus each month with a clear conscience, as it were!

It would be unfair to give you any false illusions on the way your credit history is likely to be looked at by mortgage lenders currently - it will take 6 years for the payday loans to "fall off" your history, and until those are done you're not going to be on any sort of level playing field with people who have never had such products, however over time you will find that things do start to improve, even within that 6 year period. How long are you imagining you'll need to save for the sort of level of deposit you need on a purchase?

In terms of locations for savings once the debt is gone -
LISA because of the bonus
then - regular saver account from your own bank is worth looking at
- opening another current account with a different provider specifically to get access to another regular saver
- read the weekly email/the main MSE site for up to date details of the best stand-alone savings accounts out there. where accounts have a "bonus" rate for the first year make sure you diarise to ditch & switch at the end of that time period.

Clearing Overdraft VS Money Management

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