Tag Archives: Financial Planning

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

Demand for financial advice doubles in five years

By Robert Wright /November 23,2021/

If your car engine sounds dodgy, you see a mechanic. If you’re unwell, you see a doctor. If you’ve got a tooth ache, you see a dentist. But what about when you’re looking to better manage your finances?

According to 2020 figures from research group Investment Trends, 2.6 million Aussies said they intended to seek help from a financial adviser over the next two years, up from 2.1 million in 2019 and double the levels seen in 2015.

Findings also revealed that COVID-19 had prompted greater engagement between Aussies and financial advisers where a relationship already existed.

Demand for advice is on the rise

Talking about the report findings, Investment Trends Senior Analyst King Loong Choi said, against a backdrop of economic uncertainty and volatile markets, a record number of non-advised Australians realise they need assistance from a professional.

“Among these potential advised clients, the pandemic has been a major catalyst, with 44% saying the COVID-19 situation had increased their likelihood of seeking advice,” he said.

Greater engagement between advisers and clients

The research also showed three in four financial advice clients had been in contact with their adviser to discuss the impact of the COVID-19 pandemic.

“Most financial planners have proactively engaged with their clients during this period of volatile markets, and clients themselves acknowledge these efforts,” Choi said.

The topics Aussies want advice on

There might be particular goals, events or circumstances that prompt financial advice, including unexpected situations like redundancy, death or divorce.

According to a survey by ASIC, the most common topics that participants had received advice on, or were interested in receiving advice on, were:

• investments (eg shares and managed funds) – 45%
• retirement income planning – 37%
• growing superannuation – 31%
• budgeting or cash flow management – 22%
• aged care planning – 18%

Other topics also included risk protection, self managed super funds, debt management, switching or consolidating super, and estate planning.

What’s involved when you see an adviser

You may opt to receive simple advice on a particular issue, broader financial advice, or ongoing financial advice.

After you’ve discussed your goals, objectives and attitude to risk, your adviser can then provide you with recommendations and a product disclosure statement for any product they’ve recommended.

As part of this process, it’s important to understand how you will be charged and you’ll also need to assess whether the advice provided is right for you. After all, it is your money.

Source: AMP

What alternative assets bring to your super investment mix

By Robert Wright /November 17,2021/

Most of us have heard of the main asset classes: shares, property, fixed interest and cash, but alternative assets are less well known. However, these types of assets can provide further diversification and enhanced returns for your super.

Alternative investments are those found outside the traditional asset classes. Typical ones include real estate, private equity, venture capital, infrastructure, renewable energy, hedge funds, commodities, and private debt.

Generally, these are assets that aren’t correlated to the performance of the sharemarket, that is they can often perform when sharemarket returns are down or flat.

The net result is that alternative investments add an extra layer of diversification – you’re not ‘putting all of your eggs in one basket’ and seeing all asset class suffer at the same time.

Low returns pique interest in alternatives

In the current low interest rate environment, which tends to mean lower returns for cash and bonds, alternative investments can help members grow their super to retire comfortably.

Alternative investments differ to publicly available funds as they’re part of the private investment market and aren’t easily accessible for individual investors. They typically include:

Infrastructure

Infrastructure assets are known for providing long-term, stable and predictable cash flows. Opportunities can be found within energy production and transmission but are also emerging in newer sectors such as agriculture infrastructure and renewable energy, particularly wind-powered energy and a selection of solar-power opportunities.

Private equity

The private equity sector invests in companies that are not publicly traded. The advantage is that by investing at the start of a company’s lifecycle, it’s possible to generate strong risk-adjusted returns and benefit from high earnings growth when compared to listed markets.

Real estate

Real estate has a low correlation to shares but is often considered to be a good hedge against inflation. The asset class has evolved over time to include publicly listed and real estate investment trusts (REITs) that include data centres, childcare and storage facilities, as well as commercial real estate debt, which provides loans to commercial borrowers who need funding for real estate purposes.

Performance can lift when using alternative assets because alternatives are generally less impacted by daily market movements in the way that other assets are. Shares and bonds can be quickly affected by changing market, social and economic events, such as the COVID-19 pandemic for example. Therefore, the overall volatility, or the ‘roller-coaster ride’ of increasing and decreasing valuations, should reduce when funds include a proportion of alternative assets in the mix.

Not all alternatives are equal

Of course, alternative assets need to be carefully researched and reviewed in order to find the most appropriate options for each particular fund. They need to be carefully weighed up against other asset classes and sectors to ensure the most appropriate levels of risk and reward that will support investors to achieve a comfortable retirement.

Source: IOOF