- psychology of borrowing
- debit vs credit cards
- credit card features
- student loans
- credit score
- mortgages & offset accounts
- loan refinancing
- 5 c's of credit
- peer-to-peer lending
- practical steps
debit vs credit cards
- In Australia, being in debt has become somewhat a natural and normalised financial situation
- This is because society is often driven by needs for instant gratification, and that credit is widely available through the proliferation of lenders
- The video presents that debt should be viewed as last resort option, and offers a framework to consider whether it is ideal or not
debit vs credit cards
- Debit cards give customers direct access to their transaction account. They can be used at cash registers, ATMs or for online payments, with money coming straight out of the account.
- For purchases made on the credit card, money will come from the bank (or credit card company) with the intention that the customer will pay back the amount at a later date, including any interest accumulated.
- These repayment schedules usually occur on a monthly cycle so that any debt at the end of a month will have to be paid off, otherwise the customer will incur interest on the outstanding balance which will be rolled into the next month.
- The interest rates on credit cards are also quite high, meaning failure to pay off credit card debt can lead to excessive financial hardship very quickly.
credit card features
- Using a credit card to purchase goods and services will incur a debt. The interest applied to the debt is a purchase rate, which is usually presented as an annual rate.
- Some credit cards may allow you to withdraw cash. Interest applied to this withdrawal is known as a cash advance rate, and is calculated in a similar manner to the purchase rate. In most cases, the cash advance rate will be higher than the purchase rate.
- A balance transfer may be an option for credit card holders who want to transfer debt from multiple cards into the one card. This service will often incur a fee, however individuals may elect to undertake a balance transfer because the interest incurred on one card may be lower than the other, or consolidating debt onto one card may allow them to keep track of their debt in a more simplified manner.
- A common feature amongst cards are rewards points, and are there as an agreement between card companies and other businesses to entice card users into making certain purchases. These reward points give customers bonuses on transactions that can be used to gain additional goods and services, for example flights or holidays.
- Tip: you can compare a range of credit cards at Credit Card Compare & Mozo
- There a few issues to think about when applying for a loan, and one must consider their own circumstances and needs before borrowing money as there are different options available.
- The first consideration is whether the loan will be secured or unsecured. Borrowing money to buy an asset generally means that you are after a secured loan, as the asset can be used as collateral in the loan agreement. A failure to pay your debt can result in the asset being claimed by the lender.
- An unsecured loan is debt that isn’t tied to any collateral, usually on lesser amounts of borrowings, and includes things like credit cards and small personal loans. Unsecured loans usually attract more interest.
- When taking out certain loans, you may also have the option to decide whether you want a fixed interest rate, a variable interest rate, or a mixture of the two.
- Money lenders will base their interest rate on a market interest rate which is set by the Reserve Bank of Australia, and this will affect the rates available to the customer when taking out the loan.
- A variable rate loan will likely adjust its interest rates throughout the term of the loan, whether that is beneficial to the customer is dependent on which way the rate moves!
- A fixed rate loan will remove this uncertainty, however you can lose out on lower repayments if the lender drops their variable rate.
- Loans may also require a repayment plan which will highlight three main factors. The plan includes the timeframe of the loan, frequency of repayments, and the amount of each instalment.
- In Australia, there are various types of student loans available depending on the type of selected course, and the purpose of the loan (e.g. some are designed for food & beverage expenses, whilst others are for education fees).
- Student loans are interest-free.
- They are however indexed to the CPI – meaning the remaining debt balance of a student loan rises with inflation.
- The Government makes it compulsory to repay parts of remaining student loans, once an individual’s income exceeds at certain amount.
- Tip: you can find out more information about students loans at Study Assist.
- A credit score allows lenders to judge a prospective borrower on how likely they will be able to repay their debts. Every time an individual borrows at an institution, a record will be kept by a credit reporting agency. From there, they will track your history of repayment and then calculate a score based on your consistency of meeting your payment deadlines.
- The higher your credit score, the more confident the credit ratings agency will be in the individual to meet their debt obligations, while lower scores indicate to lenders that a borrower has a lesser ability to repay their debts. These scores are important to both parties because higher risk borrowers attract a higher interest rate, due to potential risk, or they can have their loan application rejected altogether.
- Guarantors can be helpful for a borrower, especially if they don’t have a debt history. The guarantor will essentially agree to make the debt repayments if an unforeseen event occurs, and the borrower is unable to meet their obligations.
- There are various ways to build credit history. Bills, including mobile contracts, and credit cards are commonly used to build a credit score as they are usually smaller amounts with less risk to a borrower.
- Individuals also have a right to access their own credit score – and are entitled to a free report each year.
- Tip: you can get access to your credit score at Get Credit Score and Credit Simple.
mortgages & offset accounts
- Mortgage loans are typically the longest duration amongst all other personal loans.
- Banks & lenders have a solution for borrowers, if they want to reduce the amount of liable annual interest through an offset account.
- For example – a borrower has a $500,000 mortgage debt outstanding, and they have $10,000 in residual savings. If this $10,000 is placed in an offset account, the lender will calculate interest on $490,000 (calculated as $500,000 – $10,000). This results in a lower interest liability.
- With most offset accounts, borrowers can freely withdraw from the account.
- Offset accounts typically accrue no interest income.
- Refinancing a loan can be used to lower the amount of interest you pay on your debt. The video highlights an example of how someone can refinance if the market shifts and they find themselves in an unfavourable position, because their current loan is higher than that of which is available elsewhere.
- Moving debts into lower interest agreements may not necessarily be beneficial, as some lenders do have fees and terms that could end up causing a greater financial outlay. A consideration of personal circumstances, as well as thorough research, is needed in order to ensure that refinancing is the right option.
bonus: 5 c’s of credit
If you are shopping around for a loan, you should first address the purpose of acquiring one. If the purpose is to purchase an asset like a car or a property, then you might look towards a secured loan. If it is for day-to-day expenses, then you might look towards an unsecured loan (e.g. personal loan or credit card). Remember that unsecured loans typically carry higher interest rates, because they are more risky for lenders.
Do some research on lenders and interest rates. There are hundreds of lenders in Australia, all of whom offer different rates and specialise in different segments (i.e. some specialise in personal loans, some on home loans, others on car loans). Look on different loan comparison websites, or speak with a mortgage broker who can narrow your hunt. It is a useful process to also research what economists are predicting in regards to interest rate movements (i.e. if they forecast a short-term rate cut, then perhaps it is worth holding out for a better deal).
If you are taking on a large debt relative to your income, try to see if having a guarantor is an option. Depending on the lender, this might increase your chance of loan approval, and perhaps result in a lower interest rate.
Examine all associated costs with receiving a loan. For example, lenders sometimes charge a loan application fee. If you are seeking a home loan, you might have to pay for lender’s mortgage insurance (usually if you are providing less than a 20% deposit).
Create a plan as to how you are going to repay the loan. You should include debt and interest repayments in your budget as a fixed expense – this way you reduce the chances that the debt becomes burdensome. Try to build repayment scenarios in the instance that you lose your job, or if interest rates change. Remember that debt can be both useful and dangerous.
Try to pay off debts in time. A good credit history will enable you to borrow again in the future, if you need to.
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