Paying Loans Off & Credit Score

Hello,

Read a few different things so slightly confused.

I will be doubling my wage when I start my new job next month (currently in a graduate's 16k job) so will have plenty of money to pay things off. I have some loans, overdraft, direct debits etc which I got whilst studying and these are obviously hampering my credit score (around 620 according to Experien). I want to get this up as me and my girlfriend are looking to get a mortgage in the next few years.

Anyway, my question is - if I started paying all my debt off early and got it cleared within the next few months will this improve my credit score? I read a few articles a while back suggesting that paying off debt early doesn't necessarily mean your credit score goes up? I reckon I could have cleared by the end of the Summer.

Thanks

Reply 1

ddrrzzeerr

I doubt it will make much difference.

Debt isn't a bad thing as long as you meet your agreed payments. In fact, it is a good thing to have responsible use of debt on your credit file because it shows that you have paid it off.

Obviously banks wouldn't want you to have a lot of debt when you apply for a mortgage because if you are making payments on current debt, it leaves you with less money to pay the mortgage.

It's all relative to income though. For someone earning 32k, a few thousand in debt is not a lot.

Don't obsess over credit score, banks use there on way of determining your suitablity. Just do the things that are commonly advised to improve it.

Reply 2

danolu

Original post by Sternumator

Thanks for your reply.

I think I've only ever missed one payment before (basically forgot it was coming out) which brought my score down a fair bit. I think it's more me wanting to clear the finance associated with my name and just having my car and the odd direct debit coming out each month. We're currently saving for a deposit and we are both more than happy to wait a year or two but I just want that credit score to go up even if it isn't massively relevant.

Reply 3

ddrrzzeerr

There is definitely a phycological benefit of getting out of debt and boosting your credit score and obviously, if you are paying interest on it, it makes financial sense.

But you are not taking a mortgage out in a few months, you are taking it in a few years. A bank looking at your credit report in a few years isn't going to care whether you paid off your current debts in a few months or a year or two. As long as you don't miss any payments.

Reply 4

Kieran1996

If by a few years you mean more than 3 than you'll be fine if you don't miss another payment, pay all your debts off and your statements show that you are a sensible spender (i.e. no gambling)

Reply 5

danolu

Original post by Kieran1996

If by a few years you mean more than 3 than you'll be fine if you don't miss another payment, pay all your debts off and your statements show that you are a sensible spender (i.e. no gambling)

Would say around two years, realistically. I think my loans all end in 2017 so I'm hoping that is plenty of time for my score to go up.

Reply 6

Kieran1996

Original post by danolu

Would say around two years, realistically. I think my loans all end in 2017 so I'm hoping that is plenty of time for my score to go up.

I think you'll be fine, remember they'll only look at 3 past month statements so just make sure in the run up you keep it looking crystal clear (but still do stuff, it looks even worse if you seem to never buy stuff as they then cannot judge your finance ability)

Good luck :smile:

Reply 7

username1799249

Original post by danolu

Anyway, my question is - if I started paying all my debt off early and got it cleared within the next few months will this improve my credit score?

Pay your debt off because it is costing you money. Remember - you only need a good credit rating if you need to borrow. But if you are in a position to pay off your debts and start saving, you won't need to borrow because you can buy things out of savings, which is kind of how it should be.

As for your credit rating. I found that my movings around as a student had a big negative impact. Also, being on the electoral role helps. Having a credit card used occasionally and paid off in full is a good way of showing you are responsible.

Good luck!

PS Pay off your debt - it is a wonderful feeling!

Reply 8

Iknowbest

Like mentioned it is many things that can improve your credit rating including, long term fixed address, electoral role and good financial accounts. paying off your debts will of course go in your favour because you will reduce your outgoings and therefor give you more "free money" to spend. Having credit on your file and showing regular monthly payments helps to show creditors that you are able to make payments and this will increase your credit score of course. Rather than a student loan, you might be better to have smaller credit arrangements with lower repayments.. ie small credit card, etc.. mobile phone bills can be good too.

When a company want to borrow you large amounts of money, ie mortgage, it is not only your credit file they will want from you. The higher your deposit, of course the better, and they will take into account the value of the property to amount borrowing, and use your house as collateral... so in fact making it much easier to get a mortgage than you might think. They will simply repossess your home if you do not pay! Unlike credit for a car, for example, where it devalues right after purchase!

When purchasing a house.. they will usually have a set calculation from what you earn.. minus usual outgoings, then take a look at your credit file, then they will see if you fit the criteria.. reducing the amount you need to borrow (deposit) in comparison to the value of the house can really have a large influence. Also the housing market in the area you want to purchase and the time of purchase can have an influence.

So overall your credit score would be beneficial to be as high as possible but it will only be a factor in the overall decision to give you a mortgage.

My advice is to pay off your debt asap, use this extra cash once paid off to save save save your deposit.. you will then be in a MUCH better position to purchase a property in 2 or 3 years time.

Reply 9

LaurenceCuckoo

Original post by danolu

I used to work for Halifax and all of the above advice given is excellent. One thing to aim for once you've paid of the majority of your credit is regular small use of things like an overdraft or credit card that is manageable and easily paid off.

For example, a great use of a credit card is for all of your food shopping throughout the month, and then clearing the balance at the end of the month. It shows regular payments but also regular use.

A credit score is as much a way of banks and lenders seeing how much of a profitable customer you are as it is a way of seeing how good you are at keeping up with repayments so if you can use regularly, making the bank small profit in interest, and pay off regularly, showing your competence with money, your credit rating will raise pretty quickly.

Reply 10

danolu

Thanks for the above advice, very helpful!

Paying off everything early is certainly something I'd rather do, even for peace of mind so I feel 'clean'. My girlfriend is fantastic with money, only has a car to pay for and a 0% interest credit card that she pays off every month. We have a Save to Buy account with around £5k (around a year of saving minimal amounts) in there, the plan is to get to around £15/20k which I feel is easily achievable when I start my new job.

Reply 11

LaurenceCuckoo

Original post by danolu

I've previously been so completely and utterly $%*& with money and had to learn sound financial planning the hard way on my own so big respect to any and all like yourself that manage what their doing so sensibly and seek advice when they need it. In a world where aaaaalllllll the shiny things we want are just a button click away it can be really difficult so keep it up and you'll be in your own cozy pad before you know it :h:

Reply 12

Napp

Yes and no... paying off your debt whilst obviously good comes with two draw backs to creditors;
1] paying off your debt in large slabs or at once deprives them of money from interest payments and they tend to frown on it [even if they dont publicly say so]
2] paying off all your debt will leave you [most of the time but not always] with a large amount of potential credit which is not seen as particularly good.