Bad credit behaviour – What does it mean and how can it be solved before its’ too late? (Ep.65)

Resources:

• Experian – credit report 
• Illion – credit report 
• Equifax – credit report 
• Money Management – 7 steps to success (Ep.30) 
• Five mortgage strategies that can grow your wealth 
• Mortgage Strategy 101 – Ep 2. Money management 
• Mortgage Strategy 101 – Ep 11. How to set money goals so that budgets are a thing of the past! 
• Mortgage Strategy 101 – Ep 7. Getting the buckets set up in your money management system 
• The biggest misconceptions about offset accounts – Real Estate Talk with Kevin Turner 
• Four critical mortgage offset strategies 
• Mortgage Strategy 101 – Ep 6. Offset optimisation 
• Offset accounts – God’s gift to mortgage strategy! (Ep.40) 
• Why your Mortgage Strategy is more important than your interest rate! (Ep. 9 ) 
• Home Loan Headaches: How To Avoid Stretching Your Budget Too Far When Buying A Home 
• The Rising Cost of Interest Only and Investment Loans – Key Considerations For You 
• Why You Should Pay Interest Only 
• ASIC allow switching from principal and interest to interest only 
• How mortgage strategy shapes your ability to hold property and grow your wealth for decades into the future! (Ep. 24) 
• How our mortgage strategy helps us to hold properties 
• Home loan headaches – how to avoid stretchng your budget too far when buying a home  
• Your borrowing capacity has increased – do you know by how much?  
• Property Cycle Management – why now is always the best time to buy if it suits your personal economy and you have a long-term property plan (Ep. 12)  
• Why your approach and assessment of risk is paramount to property success! (Ep.10)  
• Why short-term investing has long-term consequences  
• Mortgage Strategy 101 – Ep 3. Holding Property  
• How to succeed with Property and Create your Ideal Lifestyle  
• Mortgage Strategy 101 – YouTube video series 

Show notes

• Comprehensive credit reporting 
• Previously, your credit report may have included information like when you applied for credit products and any defaults you’ve had. 
• With CCR your credit report includes additional information like the dates you opened and closed your personal credit account, account type, credit limits you have and up to 24 months of repayment history. 
• CCR enables credit providers to obtain a more comprehensive view of your financial situation to better meet responsible lending obligations. 
• What’s in your credit report 
• Each credit product you’ve held in the last two years 
• Repayment history 
• Defaults on loans, credit cards and utility bills 
• Credit applications – number of applications you’ve made, total amount of credit borrowed, loans you have guaranteed.  
• Bankruptcy and debt agreements 
• How your credit score is calculated – what’s in your credit report: 
  • the amount of money you’ve borrowed 
  • the number of credit applications you’ve made 
  • whether you pay on time 
• Depending on the credit reporting agency, your score will be between zero and either 1,000 or 1,200. 
• The score relates to a five-point scale (excellent, very good, good, average and below average). This helps a lender work out how risky it is for them to lend to you. 
• What is likely is that interest rates will be lower for people with a high credit score and also LVR.  
• A service provider can report a default if:  
• the amount owed is $150 or more, and 
• your service provider can’t contact you (called a clearout) 
• 60 days or more have passed since the due date, and 
• the service provider has asked you to pay the debt either by phone or in writing. 
• How to check your credit score 
• There are a number of websites that allow you to check your credit score, we recommend these three because they are the ones the banks use most frequently when assessing loan application and also government recommended. Check out the resources below!
  • Equifax 
  • Credit savvy (Experian) 
  • Illion 
• You have the right to access your credit score and credit report for free. Avoid any provider that asks you to pay or give them your credit card details. 
• Critical mistakes to avoid 
• Direct debit – credit card is out of date – you understand what you’ve signed your credit card up for. Last minute SMS telling you that you’re late. 
• When you enter into a plan, you enter into a credit arrangement – eg: phone bill, gym membership. 
• Missing a repayment 
• Maxing out your credit limit 
• Applying for balance transfers too often 
• Closing credit cards that have a good repayment history 
• Applying for several credit or loan products at once 
• Getting a credit default or judgement 
• Ignoring errors on your credit report 
• Not alerting creditors when you change your name (marriage) 
• Borrowing money to boost your credit score 
• Not regularly checking your credit report 
• Credit cards 
• Credit cards can be a great tool for reducing interest  – IF you pay them off in time! 
  • By spending money on the credit card, that means that your cash savings are in your offset account for a longer period of time and reducing your interest.  
  • If you are using a credit card, pay it off in full on the first day of the new month from your savings account. Do not pay off a credit card on the random date set by the lender that changes every 55 days. Don’t partly pay if off either! 
  • The credit card manufacturers intend for the direct debits to confuse your spending habits so that you’ll pay random interest or late payment fees throughout the year.  This often ends up costing you more than the benefit of any frequent flyer points! 
  • Many institutions will not even let you set up a direct debit for the first day of the month on credit cards.  
  • It’s vital that you can accurately track your monthly spending. 
• If you have poor spending habits and are not organised enough to pay off the credit card before interest accrues and late payment fees apply, then perhaps you shouldn’t be using a credit card.   
• What is debt consolidation? 
• Something that people need to do when their finances get a bit out of hand = not an ideal position to be in. Can be a strategy to control cash flow and bring it down. Consolidate two or more debts into one repayment. Eg: home loan, car loan and credit card debts. 
• Debt consolidation (or refinancing) can make it easier to manage your repayments. The quantum is getting out of control. If you consolidate into a home loan, the repayment term is then 30 years and with lower interest rate. It would improve your monthly cash flow, the problem is you are extending the term of the debt, it will take longer to pay it off and you may pay more interest over the term. 
• If you are in a position where you do have some financial troubles, there are some second tier lenders who specialise in this market and they will be more flexible in allowing you to access finance. There are fees and interest rates are higher, if you then meet your repayments, you then put yourself into a position where you can refinance back onto lower rates with mainstream lenders. 
• Prevention is always better than cure, reach out when you find things are getting out of hand and you may be able to find a solution that is less costly and things haven’t unraveled as far. 
• If someone is on JobKeeper, you may not be in a position to be able to refinance, but still it’s better to look at what options you have sooner rather than later. 
• If you do consolidate your debt, you need to keep your investment debt separate from your non-tax deductible debt. 
• Interest only on investment – interest rates are higher, but after the tax deduction, the money is effectively cheaper. 
• Money management 
• App to see the balance of the card – monitor spending. Trap that you have a card that taps and goes and it’s convenient.  
• We’re spending less – greatest level of savings on savings on record, that directly correlates with lack of consumption spending. Over 90% of the reduction in our GDP was due to not spending.  
• Travel budgets – people who allocate money to travel, it’s just sitting there. I’m embracing the fact that we’ll see some money flying domestically, weekend getaways and regions. $65B spent on overseas tourism last year and if we spend a third of that, it will fix the hole in our economy.  
• Pete’s tips – first step to managing your money well is to have a budget, spend less than what you earn. Sounds simple, but not as straight forward if you have a credit card. Save at least 10%.  
• As you get pay rises, keep a fair chunk of your payrise, don’t spend.  
• Bad credit stories: 
• Recent clients that were knocked back by ANZ for a credit card default dating back to 02/2016 for $13K. They paid the debt off in full at that time within two weeks of receiving a call from the bank, but it had already been listed as a default. They weren’t aware it was listed as a default and are now having issues with getting a loan approval. Existing lender is going to be their best chance. Default stays listed for 5 years. Now may only get approved with the lender that gave them the default.  
• Assessors go through statements line by line, if you have behaviour that suggests an issue with spending or gambling, they will pick up on this. Don’t withdraw money from an ATM near a casino. It’s must harder to hide bad spending habits. 
• Undisclosed debts on a credit application – Previously if clients forgot to put down a debt it might have slipped through now with open credit reporting every lender can see every debt and history of the debt you have. Leaving out debts can result in flat declines with some lenders 
• Buy now, pay later and pawn brokers – think about what picture does this create for the lender? Different to layby – you didn’t get it until you paid for it. 
• Even honest mistakes still stick with you for up to 5 years. Pay your bills on time, move on and clear ahead.  
• If you do find that you’ve made a boo boo, you can ask them to make a special note on your file.  
• If you are a director of a company, the lenders will pick up on this and get hassles with finance. The lender wants to know that that company is trading profitably. This can make it more complicated when you’re looking to get finance. 

David Johnston- The Property Planner’s Golden nugget:  take responsibility for your finances, pay your bills on time, know how much you save, set up a budget, have a clear money management system, start trialing investing. Slowly tip some money into the share market, learn and educate yourself on money management and investing.  

Cate Bakos – The Property Buyer’s Golden nugget: the only thing I want my daughter to get into debt for, is an appreciating asset. When she can demonstrate that her hot pair of shoes are not a depreciating asset, we can have a conversation, but until then, it’s only property.