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Improving credit rating - advice needed(6 Posts)
I haven't NCed for this, decided to bear the shame!
I got in a bit of a mess financially over the past year. I missed quite a few credit card payments, and also have an overdraft on an old current account that racked up. I'm trying to take steps now to sort it all out. It's rather embarrassing as I have a well-paid job, no mortgage, and no real outgoings. No excuse, I know.
As things stand, I owe £2100 on my credit card, and £700 on an overdraft.
My income is about £1800 per month, and I transfer £600 per month to our joint account to cover rent and other household expenses. I have no student loans and no other debts. I'm trying to figure out what the hell the rest of my money goes on. As things stand I have about £500 in my current account.
From 1 July my income will increase to about £2500 per month (I think). My DH is on a similar salary, no DCs. We are also going to be moving house over the summer.
I hope to be able to clear all the debt by the end of the year, as I think it is financially feasible.
I have three questions:
1. Should I prioritise the credit card, and then clear the overdraft, or would it be best to get movement on both debts at the same time (ie pay £400 on the cc, and £200 on the o/d each month?
2. Would it be worth going into my agreed overdraft on my 'current' current account in order to clear this debt? Or is that merely a false economy?
3. What can I do to improve my credit rating once the debt is paid off? I read somewhere that once the debt is cleared, I should write to the lender and ask them to remove the negative rating. Has anyone any advice on this?
Many thanks to anyone who has any advice to offer or experiences to share.
Right, so a number of issues here.
1. Improving your credit rating is not your top priority. You have debt behaviour which is significantly out of control. Think about that one later. I think it's telling that you chose that aspect to refer to in the name of your thread - you're in denial about your money problem, frankly.
2. Don't plan your repayments until you've got a handle on your spending. I normally recommend You Need a Budget which is also great for handling debts, but there are lots of alternatives. You can also get lots of help scrutinising your budget on The Motley Fool and Moneysaving Expert.
3. One of the biggest budget killers is unpredictable, irregular expenses. Moving house is probably one of the worst of those (more so than having a baby, I think). So you badly need to get a handle on things before you move, but be prepared to flex your plan substantially around hidden costs in moving house. Presumably at a minimum it will change the amount you need to pay into the joint budget?
In terms of planning your debt reduction, the main thing to consider is the interest rate on each debt. You don't mention this so if you don't know what each of them is, you need to find out pronto.
That said, one good technique for debt reduction is snowballing where you pay off the smallest debt first, irrespective of interest rate. Do a calculation here to illustrate what this means.
Good luck - for this month make sure all minimum payments are met and you are up-to-date. Then use the breathing space before next month to really plan your strategy.
Good advice on the breathing space and formulating a strategy. Household budgets is something that we have never done, but you are right: it should be addressed as a matter of priority to figure out disposable income each month.
I should have mentioned that I have £800 coming to me next month for work-related expenses. So that will go right away into the credit card account, bringing me to £1300. Also that the moving expenses (packers, moving etc) will be covered by my new employers, so it's likely that we will place it on my DH's credit card to be reimbursed.
I don't really think I'm in denial, tbh! I'm trying to take steps to sort it all out. I could go into the whys and wherefores it all went wrong. I was not spending a fortune in Harvey Nicks; rather my life changed rapidly in the last year, with a lot of personal turmoil, and I didn't update accounts/bills accordingly. I know that I can clear this debt within 6 months, and so my priority for the future is to try and improve the credit score. It wasn't about not facing the situation, or anything like that. [suitably chastised all the same]
I really appreciate your taking the time to advise me, many thanks
Well, I would take a look at the stuff on the YNAB site in terms of understanding the method even if you decide not to use the software, there's an awful lot of training material there which is highly relevant. Part of the idea is to build up a sufficient buffer that changes of circumstance shouldn't mean hitting the cards. Likewise making budgeting part of the daily routine (which takes some getting used to, I haven't done any for about a week due to a bout of illness, which feels like a long time) helps to keep things on the straight and narrow.
Responsible use of credit is probably the best way to build your rating back up again but I don't think you can ask for the markers to be taken off. Again, I would focus on getting on to a secure financial footing so that you can use credit cards rather than them using you! Clearing this debt is only part of the issue - many people who clear debts run them back up again, in the same way lots of dieters rebound. I think that's why I'm saying focusing on your behaviour is more useful. Hope that helps.
I started the year with a proper budgeting spreadsheet. It soon flagged up where the money black hole was and what I can do about it. It might be worth you spending an evening going through the last 3 months statements and making a list of everything you spend. Getting a handle in what you spend is crucial.
My cc debt is a lot more than yours and I planning to pay it all off in 9 months. Good luck.
Thanks both. Me using credit cards rather then them using me is an apt point. Debt-laden young academics are a hidden, guilty secret of the university system. But hoping I can try and sort it all out in the near future.
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