Pay off 0% credit card or keep savings higher...

[Fusion]

I'd probably pay off the card, but I have a debt-averse attitude (apart from a mortgage, which is a bit different).

 

[Semple]

... given I plan to soon apply for a mortgage?

Will it make getting a good mortgage easier if I pay the 0% credit card off by dipping into my savings? Or will I be in a better position if I show I have higher savings (and an amount on the 0% credit card)? Or, will it make no difference whatsoever?

I have around 4% of my gross salary on the credit card and just repay the minimum each month. My initial plan was then to clear it or roll it over to another 0% card. The balance on this card only ever decreases.

The OH thinks it makes more sense to clear the credit card in this case. However, to me it is free money at the moment but if clearing it means we could get a slightly better mortgage, then I no longer see it as free money because there would then be some value associated to clearing it/cost associated with keeping it.

It won't make any difference to getting a "better rate" as that's based on your LTV.

It will affect your affordability scores though, so it depends on the household income, how much deposit you have, and the price of the property.

 

[TNGL]

So the adviser has provided his advice. He erred more on the side of paying it off once it gets to the application stage but didn't expect it to have a big difference.

 

[ukxenon]

I'd probably pay off the card, but I have a debt-averse attitude (apart from a mortgage, which is a bit different).

Pay off the card debt is debt and it can bite you in the ankle at any time better to have a buffer than nothing at all
the least have going out the better

 

[Basher]

Pay off the card debt is debt and it can bite you in the ankle at any time better to have a buffer than nothing at all
the least have going out the better

Debt isn't bad. Unaffordable debt is bad. Paying if off would reduce your buffer short term and longer term you'll be worse off by paying it off.

So assuming it doesn't impact affordability analysis for the mortgage, I can't see a justification for paying it off.

 

[Syla5]

@TNGL There is a lot of very wrong information in this post.

Some things for you to know is that the bank will do a stress test on your application for affordability impact due to external economic impact or potential changes in personal circumstances. Under stress testing unsecured debt has a much bigger impact on affordability and ability to pay then savings does. A credit card interest rate can be changed at any point and so for example having £3k on an interest free credit card is much worse to the mortgage lender then having £3k in savings.

Savings also dont really account for anything in a mortgage application unless they are being utilised for the deposit, as the lender has no control over what you do with your savings and cant stop you spending them any way you want.

 

[ukxenon]

Debt isn't bad. Unaffordable debt is bad. Paying if off would reduce your buffer short term and longer term you'll be worse off by paying it off.

So assuming it doesn't impact affordability analysis for the mortgage, I can't see a justification for paying it off.

My opinion is if you have the card free and owe nothing then nothing can hurt you .....over the years i have made small mistakes like this BUT i am anti debt

 

[Luckystrike123]

I feel that in these uncertain times that liquidity is more important than paying off a small debt.

What if you or the Mrs loose your job? I have a couple of friends whose firms have recently gone under and I bet they'd rather have cash in the bank.

 

[weringo]

As is clear so far, the answer is, it depends. However one very important point which is that standard mortgages at the moment require a minimum deposit of 10% (and some banks require a higher deposit). If your deposit is less than this amount you can't even consider taking out a mortgage.

So to take a simple example, if you want to buy a £200k property and you have £20k saving and £20k credit card debt, the only thing that is clear here is that using your savings to repay your debt would eliminate your chances of getting a mortgage. Whereas if you were to use your savings towards a deposit then a lender might give you a mortgage in that situation depending on your circumstances (ability to service the CC debt etc).

Even if you have a 10% deposit, banks could easily require 15% or even 20% in the next few months given the situation and in particular if the property market crashes, so you should also bear that in mind if you currently have 10% but less than 15%/20%.

 

[Psycho Sonny]

As is clear so far, the answer is, it depends. However one very important point which is that standard mortgages at the moment require a minimum deposit of 10% (and some banks require a higher deposit). If your deposit is less than this amount you can't even consider taking out a mortgage.

So to take a simple example, if you want to buy a £200k property and you have £20k saving and £20k credit card debt, the only thing that is clear here is that using your savings to repay your debt would eliminate your chances of getting a mortgage. Whereas if you were to use your savings towards a deposit then a lender might give you a mortgage in that situation depending on your circumstances (ability to service the CC debt etc).

Even if you have a 10% deposit, banks could easily require 15% or even 20% in the next few months given the situation and in particular if the property market crashes, so you should also bear that in mind if you currently have 10% but less than 15%/20%.

I posted a much better example previously.

Pay off as much as you can so long as it doesn't drop you into a lower LTV bracket.

£200k property and say £32k deposit. You can afford to put £2k towards the credit card with no effect on the interest rate of the mortgage

 

[weringo]

I posted a much better example previously.

Pay off as much as you can so long as it doesn't drop you into a lower LTV bracket.

£200k property and say £32k deposit. You can afford to put £2k towards the credit card with no effect on the interest rate of the mortgage

Again this is too much of a generalisation and it will depend on OP's circumstances.

If repaying £2k on the credit card has no impact on the ability to get a mortgage nor the interest rate or other terms, it actually makes no financial sense to repay £2k on the credit card because you are clearing debts which carry a 0% interest rate with saving which are earning a >0% interest rate. In the current climate (and frankly any climate) having savings + debt rather than no savings + no debt also gives you a lot more flexibility should you lose your job or something else happens since you will at least have some funds to cover your outgoings for a period of time. On the other hand some people are personally a lot more comfortable being in a position of no debt.

As I said, it depends.

 

[Psycho Sonny]

Again this is too much of a generalisation and it will depend on OP's circumstances.

If repaying £2k on the credit card has no impact on the ability to get a mortgage nor the interest rate or other terms, it actually makes no financial sense to repay £2k on the credit card because you are clearing debts which carry a 0% interest rate with saving which are earning a >0% interest rate. In the current climate (and frankly any climate) having savings + debt rather than no savings + no debt also gives you a lot more flexibility should you lose your job or something else happens since you will at least have some funds to cover your outgoings for a period of time. On the other hand some people are personally a lot more comfortable being in a position of no debt.

As I said, it depends.

Savings interest isn't even worth having savings.

Also how long is £2k going to last you if you lose your job?

You have to make the minimum payments regardless.

I agree though money earning you more money is better than paying low interest debt. It's why I don't actively make payments to my student loan I just let it run.

However if lowering his debt makes it easier for him to get his dream home then I think it's worth putting £2k towards the debt in my scenario.

Alternatively if he loses out on the mortgage due to the debt then it will likely end up costing him more than the 50p in interest he will make on said savings.

If you lose your job having savings is obviously essential but if you fear for the worst like that I believe there is insurance available too as an option.

The payments he would normally have to make towards the debt could go towards insurance instead.

 

[wnb]

Pay it off, when we went to borrow some more for an extension every loan went against us. I have four buy to lets and they would not count the rent as income but they counted the outgoings of the buy to lets.