Credit rating - lump sum payment good or bad?

Kiith

Wondering if anyone knows if paying off a debt (credit card) in a lump sum would improve my credit rating.

Basically we want to refinance/consolidate debt, getting our monthly payments down under €500. This is so we can start putting more into our mortgage savings per month, and EBS have said that would put is in a good place to get approved, according to their criteria.

When looking for refinance loans though, the interest rate that is being offered is quite high, due to what i assume is my not great credit rating (waiting on a credit check atm). Avant was 9.7% for example. If i was to clear my credit card, around 5k, with a lump sum from family members, would that improve my credit rating, and then the interest rates that i would be offered? And how long would that take if its the case?

Jim2007

We don't have a credit rating system as such. In accordance with EU directive and Irish law the Central Bank maintains the Central Credit Register (CCR) where financial institutions are obliged to register certain credit related events such as missed payments, restructuring of a loan and so on. This can act as an indication if you are over extended or your failure to comply with the credit agreements you sign up to. How individual institutions use that information exactly is unknown, but it clearly is an important decision point in their processes.

Your starting point is to order a copy of your CCR report and see what is on it. Once you have that then the next step is to get as many of those points removed as possible while continuing to comply with all the agreements you have signed up to. This could mean contacting old creditors who have written off debt etc and reaching agreement with them to settle the debt as opposed to just having it written off - this may require an additional payment on your side etc.... so don't make any payments just yet.

This could take a couple of years to clean up.

To my way of thinking there is little point in putting money in a mortgage savings account, if you have a CCR report that shows you are under financial pressure and clearly not able to comply with the agreements you have signed up to. Banks are not going to lend you more money, if it's clear that you are not able to handle your current situation.

You should also be aware that the restructuring of debt can also be a reporting event which would further appear on your CCR report, so be careful how you do this.

Kiith

Thanks for all that Jim2007. We've decided to hold off doing any restructuring for now, and will just continue to pay down as much debt as we can till April next year. At that point, we might refinance, and will start saving for our deposit. Will take a bit longer, but think its worth it to clear as much debt as possible.

Requested a CCR report, so curious to see what that says.

walterking

9.7% is fairly standard for unsecured personal loans.

For mortgages banks will look at your medium term history. If you have multiple personal loans and a large credit card debt, (probably about 20%+ interest) then that will raise flags.

Pay off the credit card, get the limit reduced to €1,000 and then make sure whatever you spend is paid off every month.

Show that you can save at least €500 a month on top of all regular expenses - and that's assuming you are paying rent. Then as loans/credit cards get paid off, increase the savings amount.

Kiith

Gonna cancel the credit card as soon as its paid off anyway, don't trust myself with it anymore.

We've a BOI and credit union loan at the moment, and i'd like to consolidate them, but don't think i'd get an interest rate anywhere near as low as the existing BOI one (6.7%), so may just focus on paying off the credit union one as quick as possible once the CC is paid off.

If we're paying additional debt every month (say an extra €500 on top of the required amount), would that show that we are able to save that amount? Wondering if we should keep it "saved" for a few months, then pay off additional debt in chunks.

tvjunki

Few tips. Pay more than the minimum each month. Looks better from a banks perspective even if you pay more than just one euro. They can see minimum paid. Pay debt down as you go. If you have an extra few euro pay during the month. Better than lump sums. Will not save you anymore by waiting. The sooner the debt is gone the better.

Try to get the debt down as quick as you can as banks look at the last 18 months. Do not miss a repayment. Have an emergency fund of at least 2 months bills.

Consolidating or refinancing debt is not a good idea as you will end up with more debt and the banks will see you in a cycle of borrow pay and the re borrow or extend term.Not a good idea to as the bank will think you cannot afford the debt.Have a look at snowballing tool and if you have a little left at the end of the month out that off the most expensive debt.

Pointless saving for a mortgage with little or no interest on savings and you have a loan at 7% or more.

If you have a credit card with a high amount you can use each month the bank see that as debt even if you don’t use it so as you go reduce the amount you can use on the credit card.

Also check with the credit union if your loan in within shares see if your interest rate can be reduced. Do not extend the term.

If you want to get a mortgage next year knuckle down and sell things you do not need on eBay etc and clear the debt. A lot can happen in the 18 months the bank can see. Also from next year first time buyers can borrow I think 4 times their salary but there are exemptions. Do not borrow from family to pay debt. When you really need the support it will not be there.

It is pointless refinancing in April as it will be more than the interest you would get on savings. Better to clear debt first. I know some banks have an account you can use to save for a mortgage and they give you better savings rate but do that after all debt paid. Good luck.