Paying off finance - effect on credit score

[Jammiedodger]

We're getting ourselves ready to apply for our first mortgage, so are blitzing debts to give us the best chance of success.

I don't have a negative history with credit at all, no missed payments etc, but do have a few accounts open (credit card, small loan, car finance), which will obviously have an effect.

With this in mind the car is being sold and finance being paid off in full (HP with Barclays Partner Finance).

I've read around that this might actually have a negative effect on my credit score because it's being paid off early... even though it's reducing my level of outstanding debt, which must be a positive.

Anyone able to offer any thoughts? How long does it take for the effect to take place?

Thanks in advance.

[Pheo]

You don't actually have a single static credit score is the first thing to realise. Instead credit ref agencies provide data to lenders, who have their own individual criteria for lending.

For a mortgage, I would be very surprised if a lender would prefer you to have short term debt - they are going to be worried about your ability to pay back monthly in the first instance. Having monthly commitments makes this harder.

For example during our mortgage application process a huge amount of time was expended on ensuring we could afford the monthly repayments comfortably.

Therefore I would say what you are doing is the right thing.

[Sarnie]

Jammiedodger said:

We're getting ourselves ready to apply for our first mortgage, so are blitzing debts to give us the best chance of success.

I don't have a negative history with credit at all, no missed payments etc, but do have a few accounts open (credit card, small loan, car finance), which will obviously have an effect.

With this in mind the car is being sold and finance being paid off in full (HP with Barclays Partner Finance).

I've read around that this might actually have a negative effect on my credit score because it's being paid off early... even though it's reducing my level of outstanding debt, which must be a positive.

Anyone able to offer any thoughts? How long does it take for the effect to take place?

Thanks in advance.

You would only need to repay debts if your affordability figures are not enough for what you require.

Beyond affordability, having no debts doesn't help you secure a mortgage. Lenders actually WANT to see that you can positive take on and maintain debts. All positive behaviour on your credit file accrues you points that accumulate towards the required number of points to get an accept decision from a lender.

You would not believe the number of clients I've dealt with where the applicant has NEVER borrowed a penny....not a loan, not a credit card or anything.....and then gets declined. Not credit history at all gives the lender absolutely nothing to base their decision on, therefore they do not know how a person who has never had any debt will behave when suddenly they have one huge one. No credit history is only one rung up from adverse credit history, as far as lenders are concerned.....

OP, paying off your debts is obviously a good thing and will help your affordability figures of course, but don't do it if you think it's going to boost your chances of an accept decision......

[SPRocco]

Jammiedodger said:

We're getting ourselves ready to apply for our first mortgage, so are blitzing debts to give us the best chance of success.

I don't have a negative history with credit at all, no missed payments etc, but do have a few accounts open (credit card, small loan, car finance), which will obviously have an effect.

With this in mind the car is being sold and finance being paid off in full (HP with Barclays Partner Finance).

I've read around that this might actually have a negative effect on my credit score because it's being paid off early... even though it's reducing my level of outstanding debt, which must be a positive.

Anyone able to offer any thoughts? How long does it take for the effect to take place?

Thanks in advance.

May or may not be relevant to you (I already have a mortgage) but just adding my own info.

I recently paid off a small loan circa. £1500 and it didn't register on my Experian report for almost 2 months.

Would also note each lender has their own scoring system, you don't have a "set" credit score

[Phateuk]

Sarnie said:

Jammiedodger said:

We're getting ourselves ready to apply for our first mortgage, so are blitzing debts to give us the best chance of success.

I don't have a negative history with credit at all, no missed payments etc, but do have a few accounts open (credit card, small loan, car finance), which will obviously have an effect.

With this in mind the car is being sold and finance being paid off in full (HP with Barclays Partner Finance).

I've read around that this might actually have a negative effect on my credit score because it's being paid off early... even though it's reducing my level of outstanding debt, which must be a positive.

Anyone able to offer any thoughts? How long does it take for the effect to take place?

Thanks in advance.

You would only need to repay debts if your affordability figures are not enough for what you require.

Beyond affordability, having no debts doesn't help you secure a mortgage. Lenders actually WANT to see that you can positive take on and maintain debts. All positive behaviour on your credit file accrues you points that accumulate towards the required number of points to get an accept decision from a lender.

You would not believe the number of clients I've dealt with where the applicant has NEVER borrowed a penny....not a loan, not a credit card or anything.....and then gets declined. Not credit history at all gives the lender absolutely nothing to base their decision on, therefore they do not know how a person who has never had any debt will behave when suddenly they have one huge one. No credit history is only one rung up from adverse credit history, as far as lenders are concerned.....

OP, paying off your debts is obviously a good thing and will help your affordability figures of course, but don't do it if you think it's going to boost your chances of an accept decision......

Apologies for a mini-hijack, but I was going to start a thread very similar to this myself - How does credit card debt affect affordability calculations?

Specifically - I currently have £6k on a long 0% CC deal, I'm paying £3xx/month which will clear the card at the point of the 0% expiring. Would the lender view this as a £3xx/month commitment (as proven by bank statements) as I would imagine they do with a personal loan, or is it different? I can obviously pay this off before applying if it will have too much detrimental affect but would prefer to make full use of the 0%.

Looking to get a mortgage later this year, 0% expires end of 2017.

[Ste1987]

Sarnie said:

You would only need to repay debts if your affordability figures are not enough for what you require.

Beyond affordability, having no debts doesn't help you secure a mortgage. Lenders actually WANT to see that you can positive take on and maintain debts. All positive behaviour on your credit file accrues you points that accumulate towards the required number of points to get an accept decision from a lender.

You would not believe the number of clients I've dealt with where the applicant has NEVER borrowed a penny....not a loan, not a credit card or anything.....and then gets declined. Not credit history at all gives the lender absolutely nothing to base their decision on, therefore they do not know how a person who has never had any debt will behave when suddenly they have one huge one. No credit history is only one rung up from adverse credit history, as far as lenders are concerned.....

OP, paying off your debts is obviously a good thing and will help your affordability figures of course, but don't do it if you think it's going to boost your chances of an accept decision......

This. Have you tried getting an agreement in principle yet? It's only a soft search so won't affect your credit score, but will give you an indication of how much the bank will lend you. Might be worth doing one first with your current debts, as you may be surprised. But then, this depends on if you can afford to continue paying your debts after you move into your new home

[Sarnie]

Phateuk said:

Apologies for a mini-hijack, but I was going to start a thread very similar to this myself - How does credit card debt affect affordability calculations?

Specifically - I currently have £6k on a long 0% CC deal, I'm paying £3xx/month which will clear the card at the point of the 0% expiring. Would the lender view this as a £3xx/month commitment (as proven by bank statements) as I would imagine they do with a personal loan, or is it different? I can obviously pay this off before applying if it will have too much detrimental affect but would prefer to make full use of the 0%.

Looking to get a mortgage later this year, 0% expires end of 2017.

Lenders would usually take their own calculation of the credit card debt, usually 3% but up to 5% of the balance with some harsh lenders.

So £5k on 0% might only actually be costing you £50pm for example, but a lender would take 3% of the balance to be the normal payment, which would be £150pm. Or if you stumble into a lender that takes 5% of the balance = £250pm as an ongoing commitment, which will make more of a dent in your affordability calculations than the real world figure of £50pm.

People will say that it's on 0% and they will move it to another deal or pay it off at the end but what if you don't or can't. They have to assume the risk of that debt reverting from the 0% deal and back on to the normal c19% APR or whatever it may be........

Again, this doesn't mean you have to pay it off, your income may be sufficient to absorb the way it would be calculated, but a lot of people I deal with are usually looking to absolutely maximise their lending capacity......

[Phateuk]

Sarnie said:

Phateuk said:

Apologies for a mini-hijack, but I was going to start a thread very similar to this myself - How does credit card debt affect affordability calculations?

Specifically - I currently have £6k on a long 0% CC deal, I'm paying £3xx/month which will clear the card at the point of the 0% expiring. Would the lender view this as a £3xx/month commitment (as proven by bank statements) as I would imagine they do with a personal loan, or is it different? I can obviously pay this off before applying if it will have too much detrimental affect but would prefer to make full use of the 0%.

Looking to get a mortgage later this year, 0% expires end of 2017.

Lenders would usually take their own calculation of the credit card debt, usually 3% but up to 5% of the balance with some harsh lenders.

So £5k on 0% might only actually be costing you £50pm for example, but a lender would take 3% of the balance to be the normal payment, which would be £150pm. Or if you stumble into a lender that takes 5% of the balance = £250pm as an ongoing commitment, which will make more of a dent in your affordability calculations than the real world figure of £50pm.

People will say that it's on 0% and they will move it to another deal or pay it off at the end but what if you don't or can't. They have to assume the risk of that debt reverting from the 0% deal and back on to the normal c19% APR or whatever it may be........

Again, this doesn't mean you have to pay it off, your income may be sufficient to absorb the way it would be calculated, but a lot of people I deal with are usually looking to absolutely maximise their lending capacity......

Ok thanks Sarnie, that's useful to know.

[Jammiedodger]

Thanks for all the info guys... I've paid the finance off and found a house we want to put in an offer on... So everything's moving!