Tag Archives: Budgetting

How ‘Buy Now Pay Later’ affects your credit score

By Robert Wright /November 23,2021/

In recent years, ‘buy now pay later’ (BNPL) has become an increasingly popular method for consumers looking to purchase goods via instalments without resorting to credit cards.

These services are often billed as a safer and more convenient way for consumers to manage their spending, and their popularity has led them to become widely available.

But if you miss a payment or misunderstand the particular terms you’re agreeing to, BNPL has the potential to dent your credit score and impact your lending ability down the track.

What is BNPL?

The BNPL market is growing exponentially. Valued at $43 billion, this sector has tripled over the previous two financial years, according to the Reserve Bank of Australia.

BNPL schemes allow consumers to buy goods and services from a retailer by only paying a fraction of the price at the time of the transaction and the rest of the payments in instalments. This convenient payment method offers interest-free payments to consumers and is currently attracting considerable attention.  However, if you miss payments, you could be in trouble.

In the 2018-19 financial year, the total revenue from missed payments from all BNPL providers totalled over $43 million, a 38 per cent increase from the previous financial year.

Many people, especially younger consumers, have a general understanding of what a credit score is and that a bad credit score, or rating, can affect their ability to secure loans or lines of credit.

What they may not realise is that almost every transaction they make has the potential to impact their credit score – whether it is paying a utility bill late, carrying a lot of ‘contract debt’ by upgrading your phone every year on a plan, regularly overdrawing your bank account and using overdraft, or having multiple credit cards and only paying the minimum monthly fee.

All of these factors are taken into consideration to give a picture of your spending habits and determine whether you are a desirable candidate to lend money to. So, while it may not seem like a big deal if you pay your electricity bill a few days late, or you’ve signed up to a five year plan to pay off the latest iPhone, or regularly using BNPL services to pay for things, these actions may be chipping away at your credit rating which could cause issues when it comes to seeking a home loan down the track.

Improving your credit score

The first step is to go online and check your credit report. This is generally a free process, and everyone is entitled to one get a credit report once a year. Ensure all your personal details and queries on your credit history are correct. However, beware of any credit repair companies that claim to improve your credit score. This is simply ineffective and a rip-off.

Here are some steps to help you improve your credit score and make yourself a more desirable loan candidate if you expect to be applying for a home loan in the near future.

• Resist the lure of BNPL and other easy spending

To avoid additional scrutiny of your personal spending habits, it may be better to close your BNPL accounts and focus on only purchasing things you can pay for in full. Resist the urge to upgrade your phone unnecessarily so you can pay out your existing plan.

• Limit the amount of credit applications

In the year leading up to your mortgage application, be cautious of applying for credit. It is advised to wait until after your loan has settled to then apply for credit and take advantage of interest-free loans.

• Close any unused credit cards

If you have any unused credit cards, it is advisable to close them to increase your borrowing capacity. When assessing your loan application, a lender will often assume all credit limits are fully drawn and will count the minimum payment as an expense. This may be the difference between getting the loan or not.

• Demonstrate stability in employment and residency

Staying in the same workplace and household for at least six months is key to obtaining a home loan. Banks like to see stability, and moving jobs or houses can compromise getting a loan approved.

Source: Money & Life

Spring clean your credit rating

By Robert Wright /November 23,2021/

Is your credit rating looking a little worse for wear? Here are our tips to help you get it back into shape ahead of your next big purchase.

What is a credit score?

Lenders use your credit score to work out how reliable you’re going to be as a borrower. Whether it’s for a home loan, personal loan or credit card, having a good credit score means lenders will be more likely to lend you money. A poor credit score will make it harder for you to borrow money, as lenders might view you as a higher risk. You may even have to pay a higher rate of interest than someone with a good credit score.

How can I check my credit score?

Your credit score is found in your credit report, which is held on file by credit reporting agencies. You’re entitled to a free copy of your credit report once every three months. You can get it from these three credit reporting agencies:

• Experian
• illion (formerly Dun & Bradstreet)
• Equifax

Each agency calculates your score slightly differently, and may hold different information about you, so it’s worth checking with each.

How is my credit score calculated?

Your credit score is based on your personal financial information, which is collected from lenders, service providers and public records. Things that can influence your score include:

• how much you owe and the type of borrowings
• how many credit applications you make
• whether you make repayments on time
• whether you’ve defaulted on any debts in the last 5-7 years
• any bankruptcies, court judgments or personal insolvency agreements in your name.

From 1 July 2021, comprehensive credit reporting (CCR) became mandatory for the major lenders, requiring them to provide more detailed information about your financial history, such as:

• any credit products you’ve held in the last two years
• your usual repayment amount
• how often you make repayments and whether you pay on time.

From 1 July 2022, lenders will be required to also provide financial hardship information. The CCR scheme aims to give lenders a more accurate picture of your capacity and ability to repay credit.

Great, so how can I improve my credit score?

Finding out that you have a low credit score can be worrying. Fortunately, there are steps you can take to improve your credit score and keep it high:

1. Pay your bills on time

Always pay bills like utilities, rent, mortgage, tv, internet and phone services on time, especially if the bill is worth more than $150. If a bill costs over $150 and is at least 60 days overdue, a default can be listed on your report, which remains there for five years.

• Pay credit card, loan and other debt repayments on time

Making debt repayments on time and in full shows lenders that you can be trusted to meet your obligations. Having a good repayment history can even help boost your credit score, for example, paying off your credit card in full each month.

• Limit how many credit applications you make

Every time you apply for credit, such as a new loan, credit or store card, the application is listed on your credit report. Making lots of applications in a short space of time may affect your score, as it looks like you’re in credit distress. Only apply for credit if you genuinely need it.

• Pay off your debts

It’s generally the case that the less debt you’re carrying, the better your borrowing capacity is. So pay off your personal loans, close credit and store cards that you’re not using and reduce the limits on any other credit cards you hold.

• Fix errors on your report

Finally, it’s worth checking your full credit report carefully to make sure that it’s accurate. From time to time, incorrect information can be added to your report, which can negatively impact your credit score. If you do notice an error on your report, contact the credit provider and/or credit reporting agency and ask them to amend your report. Avoid using a third party ‘credit repair’ company to clean up your report, as they are only doing what you can do yourself for free.

By taking these simple steps, you can expect to see your credit rating improve gradually, over time. However, if you’re having trouble paying your bills on time, struggling to manage debt or having other financial difficulties, seek help from a financial counsellor as soon as possible.

Source: Money & Life

Creating an emergency budget that works for you

By Robert Wright /September 08,2021/

It could take months, even years, to clear debt – especially if you used your credit card and you know you’ll be slugged with snowballing compound interest each month you don’t pay it off.

Things might get worse if another emergency comes up and you don’t have the means to pay for it. Before you know it, you’ve dug yourself into a deep financial hole that can be hard to get out of.

That’s why it’s no surprise that financial experts recommend creating an emergency fund. It’s a pool of money you always have on hand to cover any unexpected expenses.

Any fund is better than no fund

The figure most often cited by finance media personalities is six months’ salary. So how much do you really need?

The best way to decide on a figure is to look at your personal situation, and then create a budget accordingly. Consider possible future expenses, how much you earn, what your weekly costs are and how much you could realistically live without. It will take time to build your emergency fund, but it will be worth it in the end.  

Think about it – even a few hundred dollars set aside now could mean not dipping into your credit card balance later on. This can help you avoid the rollercoaster of debt.

Work out what your unexpected costs could be

Think about the types of expenses that could come your way when you least expect them. List anything that’s outside your normal budget. This might include urgent car or home repairs, medical appointments, vet, or dental bills, or even an unexpected interstate or overseas trip to visit a sick family member.

While it’s unlikely you’ll get hit with all these expenses at once, having an idea of your potential future costs can go a long way in helping you decide your emergency savings target.

Revisit your budget

Once you know what you’re aiming for, look at your budget and work out how much you can afford to put away each week. If you don’t have a budget already – today’s the day to start one.

Consider your current financial commitments, then decide on a percentage of your wage that you’d like to put aside. For example, you might commit to saving 10% of your take-home pay until you reach your emergency fund goal.

If you’re financially stretched at the moment, putting aside money each week for something that might not happen in the future can seem like a big ask. But it may not be as tough as you first think.

Be consistent with your savings

Consider creating two separate bank accounts – one for your weekly expenses and ‘fun’ money, and another for your emergency fund. Then set up an automatic transfer so the money earmarked for emergencies goes straight into that account each payday. This way, you’ll barely even notice the money that’s gone. And over time, you’ll get used to having slightly less in your weekly expenses and ‘fun’ money account.

Replenish your fund after use

With your emergency fund now set up, you can relax knowing that you’re financially prepared for the unexpected. But remember – your fund is there for urgent, necessary costs only.

If you do need to dip it into it for a real crisis, then that’s fine – that’s what it’s there for. But make sure you top it back up again when you’re financially ready to do so. This way, if another unexpected bill comes your way, you’ll be prepared.

Talk to an adviser

Everyone’s financial situation is different. That’s why talking to a financial adviser can be so useful. They can show you how to create a budget and savings plan tailored to your needs, including an emergency fund. An adviser can also help you find the right insurance to protect your finances in the future.

Source: Colonial First State

How to reassess your spending and budgeting habits

By Robert Wright /June 11,2021/

There’s no denying the pandemic has significantly affected the finances of many Australians. Some of us are spending more, some are cutting back on non-essential spending and for others, the uncertainty has challenged us to save money for a rainy day, like never before.

According to AMP research, around one in 10 Australian employees feel that 2020’s unusual economic circumstances have had a positive impact on their financial health. However, 42% of employed Australians believe COVID-19 has had a negative impact on their financial health, whether through unemployment or underemployment.

Whichever category describes you, it’s likely you’ve seen your spending habits change over the past 12 months. This means that if you’re still working with your pre-pandemic budget, now might be a good time to review your situation and reassess your spending, so you can manage it with a revised and more realistic budget.

Changing spending habits

Over the past 12 months, have you been spending less money in restaurants, bars and department stores but more on food deliveries, online shopping and streaming? Or have you cut back across the board and started a savings surge?

With lockdown orders forcing many of us to stay home more, it’s unsurprising to learn that in December, our spending on transportation was 41% lower than the pre-pandemic norm. We did less eating out in restaurants and bars (down 30%) and are perhaps prioritising outdoor or in-home fitness over going to the gym (spending for this is down 19%).

But – stuck at home – we are spending on home improvements, 25% more than before the pandemic, plus we’re kitting out our home offices and spending on furniture, with these categories up 58%. We’re also consuming a lot more alcohol and tobacco (up a notable 53%) and relying on food deliveries – these have surged a staggering 245% on pre-pandemic figures. (All expenditure figures have been taken from the AlphaBeta and illion research.)

It’s generally thought to be a good idea to take a deep dive into your overall financial health at least once a year. And at a time when circumstances are changing so fast, there’s an opportunity to review your spending and saving habits and reassess your goals and budgets.

How to track your spending

Think about your spending habits; there’s likely to be a variation each month depending on how much you’ve earned and what your expenses are for things like rent, mortgage, car maintenance and insurance. So, to get a well-rounded picture of income and expenditures, try tracking your spending over a two to three-month period, then apply it to a full year.

How to do it? First, choose a method that’s convenient for you to quickly and easily maintain. This could be as simple as a paper ledger or Excel spreadsheet. Get into the habit of noting every dollar you spend. The simplest way is to review your bank and credit card statements, but don’t forget cash transactions such as a coffee or the vending-machine snack you grabbed on the run. Make a note of the item, amount, date and category, plus whether it’s an essential expense or a discretionary one.

If you want help tracking and analysing your data, there are plenty of apps and software that can help, depending on your goals. Some apps enable you to sync bank accounts, credit cards, loans, superannuation and more, with additional features to monitor larger expenses including bills and insurance payments. Others notify you of possible tax deductions and churn out easy-to-read spending habit reports. A number of these apps are free, while some have monthly charges – it depends on the depth of insight they offer.

How to create a budget

Once you have a good understanding of your new spending habits, it’s time to reassess that pre-pandemic budget and plan your financial future. If you’re not sure where to start, brush up on the basics and learn how to create a working budget.

Source: AMP