Remortgage With Defaults on Credit Cards

How Credit Card Defaults Affect Your Remortgage Application

Credit card defaults are classified as unsecured credit defaults, and they are generally viewed less seriously by mortgage lenders than defaults on secured lending such as mortgages or secured loans. This is an important distinction because it means that your remortgage options with credit card defaults are often better than you might initially expect.

When a credit card issuer registers a default on your account, it typically means you have missed several consecutive monthly payments, usually three to six. The card issuer will usually send you a default notice before formally registering the default, giving you an opportunity to bring the account up to date. Once the default is registered, the account is typically closed and the outstanding balance may be passed to a debt collection agency.

Lenders assessing a remortgage application with credit card defaults will look at several factors:

• The number of defaulted credit cards - A single default is viewed much more favourably than defaults across multiple cards
• The total value of the defaults - Smaller amounts are less concerning, with some lenders setting specific thresholds such as under 500 pounds or under 1,000 pounds
• Whether the defaults are satisfied - Paid-off credit card defaults are treated significantly more leniently than outstanding ones
• How recently the defaults were registered - Older defaults carry less weight, with notable improvements in options after one, two and three years
• Your credit behaviour since the defaults - Evidence of responsible credit management following the defaults is very important

It is worth noting that credit card defaults are extremely common, and lenders who operate in the specialist market deal with them routinely. They understand that financial difficulties can happen to anyone and that a credit card default does not necessarily indicate a long-term inability to manage finances. Many borrowers who defaulted on credit cards during a difficult period go on to manage their finances impeccably afterwards.

The rates available to borrowers with credit card defaults will be higher than mainstream rates but are often lower than those offered to borrowers with more serious forms of adverse credit such as mortgage defaults, CCJs or bankruptcy. This reflects the relatively lower severity that lenders attribute to unsecured credit defaults.

Satisfied vs Unsatisfied Credit Card Defaults

The distinction between satisfied and unsatisfied credit card defaults is crucial when it comes to your remortgage options, and understanding the difference can help you make decisions that improve your prospects.

Satisfied credit card defaults occur when you have paid off the full outstanding balance on the defaulted account. The default remains on your credit file but is marked as settled. Many near-prime lenders and a wide range of specialist lenders will consider applications with satisfied credit card defaults, particularly if they are older and the amounts were relatively small.

For borrowers with satisfied credit card defaults, the typical lender landscape includes:

• Some mainstream lenders may consider applications if the defaults are small, old and fully satisfied, though this is the exception rather than the rule
• Near-prime lenders commonly accept one or two small satisfied credit card defaults that are more than twelve to twenty-four months old
• Specialist lenders will accept multiple satisfied credit card defaults with flexible criteria on amounts and timeframes

Unsatisfied credit card defaults are more problematic. The outstanding debt represents a continuing liability and the risk that the creditor may take further action. Fewer lenders will consider applications with unsatisfied credit card defaults, and those that do will typically offer higher rates and lower maximum LTV ratios.

If you have unsatisfied credit card defaults, consider whether you can settle them before applying to remortgage. Many credit card companies and debt collection agencies will accept a reduced settlement amount, particularly if the debt has been outstanding for some time. Always get any settlement agreement in writing and ensure the creditor confirms they will mark the default as satisfied with the credit reference agencies.

In some cases, specialist lenders will allow you to clear unsatisfied credit card defaults from the remortgage proceeds, effectively consolidating the debt into your mortgage. While this can be a practical solution, be aware that you are converting unsecured debt into secured debt against your home, and you will be paying interest on these amounts over a potentially much longer mortgage term.

Consolidating Credit Card Debt Through Remortgaging

Many homeowners with credit card defaults consider remortgaging not just to secure a better interest rate on their mortgage but also to consolidate their outstanding credit card debt into their mortgage. This can be an attractive option, but it is important to understand both the benefits and the risks.

Potential benefits of consolidation:

• Lower monthly payments - Mortgage interest rates, even specialist rates, are typically much lower than credit card rates, which can significantly reduce your monthly outgoings
• Simplified finances - Rolling multiple debts into a single monthly mortgage payment can make managing your finances much easier
• Fresh start - Clearing outstanding credit card debts can provide a psychological boost and a clean slate to build from
• Improved cash flow - The reduction in monthly payments can free up money for other expenses or for rebuilding savings

Important risks to consider:

• Secured vs unsecured risk - By consolidating credit card debt into your mortgage, you are securing previously unsecured debt against your home. If you fail to keep up with mortgage payments, your home is at risk
• Total interest cost - Although the interest rate is lower, spreading the debt over a much longer mortgage term can mean you pay more in total interest over the life of the loan
• Increased mortgage balance - Your overall mortgage debt increases, which could affect your LTV ratio and future remortgage options
• Repeating the cycle - Some borrowers consolidate credit card debt and then build up new credit card balances, leaving them worse off than before

If you are considering debt consolidation through remortgaging, it is essential to get professional financial advice. A qualified mortgage adviser can help you understand the full implications and determine whether consolidation is genuinely in your best interests or whether alternative approaches might be more suitable.

The FCA requires lenders to ensure that any remortgage, including those involving debt consolidation, is affordable and in the borrower interests. Your adviser will carry out a thorough assessment of your financial position to make sure this requirement is met.

Rebuilding Your Credit After Credit Card Defaults

Whether you have already remortgaged or are working towards a future remortgage, rebuilding your credit profile after credit card defaults is an important long-term goal. A stronger credit score will open up better deals when your current mortgage term ends and give you more financial flexibility generally.

Use a credit builder card responsibly. Credit builder cards are specifically designed for people with impaired credit histories. They typically come with low credit limits and higher interest rates, but if you use the card for small regular purchases and pay the balance in full every month, you will build a positive payment history without paying any interest.

Set up direct debits for all regular commitments. Missing payments on any account will set back your credit rebuilding efforts. Setting up direct debits for at least the minimum payments on all credit accounts ensures you never miss a payment. If possible, pay more than the minimum to reduce balances faster.

Keep credit utilisation low. Lenders look at what percentage of your available credit you are actually using. Keeping your credit card balances below 30% of your credit limits, and ideally below 10%, demonstrates responsible credit management and helps improve your score.

Avoid multiple credit applications. Each credit application leaves a hard search on your credit file, and multiple applications in a short period can make you appear desperate for credit. Only apply for credit that you genuinely need and are likely to be approved for.

Monitor your credit reports regularly. Check your credit reports at least every few months to track your progress and spot any errors. All three main UK credit reference agencies offer free services that allow you to access your credit report, and some provide credit score tracking tools as well.

Consider the timing of your credit rebuilding. Start rebuilding as soon as possible after the defaults, as the length of your positive credit history matters. The sooner you begin establishing a pattern of responsible credit use, the stronger your profile will be when it comes time to remortgage again or apply for other credit products in the future.

What to Do If You Cannot Remortgage Right Now

If your current circumstances mean that remortgaging is not a viable option at this time, there are still steps you can take to manage your situation and improve your prospects for the future.

Speak to your current lender. Even if your lender is not willing to offer you a new fixed or tracker rate deal, they may be able to help in other ways. Under FCA guidelines, lenders are required to treat customers fairly, and if you are struggling with payments, they should work with you to find a solution. This might include temporarily switching to interest-only payments, extending your mortgage term to reduce monthly payments, or agreeing a payment holiday in extreme circumstances.

Seek free debt advice. Organisations such as StepChange, Citizens Advice and the National Debtline offer free, confidential advice to people dealing with debt problems. They can help you understand your options, create a budget, and develop a plan for managing your debts including any outstanding credit card defaults.

Create a systematic plan to address your defaults. If you have unsatisfied credit card defaults, work out a realistic plan to clear them. Contact creditors to negotiate settlement amounts and set up affordable payment arrangements. Prioritise defaults that are having the most impact on your remortgage options.

Build up your savings where possible. Even small amounts saved regularly can make a difference. Building a savings buffer provides security against future financial shocks and demonstrates to lenders that you can manage money effectively. It can also contribute to reducing your LTV ratio when you are ready to remortgage.

Set a target date for remortgaging. Based on when your defaults are due to be satisfied, when they will approach key age thresholds, and when your credit score is likely to have improved sufficiently, set a realistic target date for your remortgage application. Having a specific goal to work towards can help you stay motivated and on track.

Review your options periodically. The specialist lending market evolves constantly, with new products being introduced and criteria being updated. What is not possible today may become possible in six months or a year. Keeping in touch with a specialist broker means you will be aware of changes that could benefit you as they happen.

Working With a Broker for Credit Card Default Remortgages

The value of working with a specialist mortgage broker cannot be overstated when you have credit card defaults on your record. The broker market has developed significantly, and there are now many advisers who specialise specifically in adverse credit cases and understand the nuances of placing applications with the right lenders.

A specialist broker brings several important advantages to the process. Firstly, they have access to the full range of lenders in the market, including specialist lenders who do not deal directly with the public. Many of the best deals for borrowers with credit card defaults are only available through intermediaries, so going direct to a lender could mean missing out on more suitable options.

Secondly, a broker understands the specific criteria of different lenders in detail. This knowledge is crucial because lender criteria for adverse credit cases are complex and vary significantly. One lender might accept two satisfied credit card defaults of any age, while another might only accept one that is more than two years old. Matching your circumstances to the right lender first time avoids wasted applications and protects your credit score.

Thirdly, a good broker will present your application in the strongest possible way. This might involve providing additional information about the circumstances of your defaults, highlighting the positive aspects of your financial profile, and structuring the application to meet the specific requirements of the chosen lender. This presentation can make the difference between approval and decline.

When choosing a broker, ensure they are authorised and regulated by the Financial Conduct Authority. Ask about their experience with adverse credit cases specifically, and enquire about their fee structure before proceeding. Some brokers charge an upfront fee, others charge on completion, and some are paid entirely through commission from the lender. Understanding the costs involved helps you budget accordingly and ensures there are no surprises.

A reputable broker will also give you honest, realistic advice about your prospects. If remortgaging is not viable right now, they should tell you so and help you create a plan to improve your position for a future application rather than pushing you into an unsuitable product.