WHY PAYING YOUR CREDIT CARD ON TIME JUST BECAME A WHOLE LOT MORE IMPORTANT!
Are you a serial offender when it comes to not paying your credit card on time? “Oh well, at least it gets paid – and it doesn’t cost any extra if I’m a week late” I hear you say. Well that may have been the case just a couple of months ago, but things have changed.
Your credit report will now contain your payment history on all of your credit cards, and credit providers assessing your application for credit – including a new mortgage – will have to take into consideration your ability to meet the terms set out in your credit card agreement ie. Your ability to make repayments on time each month.
Not only that, but your abiity to repay the total debt within 3 years will need to be considered also. This means that if you are only making the minimum required repayment on your credit card each month, then you are not demonstrating your capacity to repay the entire balance within 3 years.
This is one of the new measure introduced by ASIC as a means of making the banks, and other lending bodies, accountable for the credit that is offered to consumers. And Veda (the main credit reporting facility) has already fallen into line by providing this information.
I guess it is a side affect of the banking royal commission. Whilst the banks are being demonized and portrayed as greedy overlords who prey on the weak for their own profit (and some of the stories have certainly been disgraceful), the reality is that they also provide many Australians with the opportunity to realise their dreams – whether they be home ownership, a nice holiday, or a new car.
The fear is that as a result of the Royal Commission, banks will tighten their policy so much (so as not to be seen to be taking advantage of anyone) that people who would have been approved for finance pre-Royal Commission, will now NOT be approved post-Royal Commission.
Now it’s easy to sit back and say “well maybe those people shouldn’t be given home loans anyway”. And that is fine, until that person is you, or your son or daughter. These new rules are having negative affect on real people who deserve a chance.
WHAT WILL THE OUTCOME BE?
Well, we like to help as many people a possible. Not only in realizing their home ownership dreams, but sometimes in consolidating their debts to lower their monthly repayments and make monthly budgeting more manageable.
Fortunately, there are still lenders out there who can help people who don’t fit the tightening lending criteria of the major banks. They are what we call “2nd Tier Lenders”. Normally these lenders have been able to help self employed people, or those with past credit problems. With tightening policy though, these lenders are extending their reach to people who would previously have been accepted by the banks. Some of these lenders even have products that are designed for traditional bank customers.
WHY CAN 2ND TIER LENDERS DO THIS AND THE BANKS CAN'T?
Well, 2nd tier lenders do have their own strict criteria’s. For instance, generally the loan to value ratio (LVR) is lower than would be acceptable to the banks, i.e. How much you owe in comparison to how much your property is worth. They also look at whether the loan you are applying for will help your overall financial situation – will you be in a better position financially if you were to get the loan. Also, at the end of the day, their appetite for risk is more than that of the major banks. To compensate for that increased risk, these lenders often charge a higher interest rate. Not always, but certainly sometimes.
These changes have actually been introduced as a result of an inquiry into credit cards, given Australia’s massive collective consumer credit card debt. And generally the recommendations have been welcomed by consumer groups. The affect of mortgage lending is a side affect of these changes. Given the checks and balances already in place to assess whether people can service a loan after taking into account their ongoing monthly commitments, is it a good thing to decline someone’s home loan based on their credit card debt? I’m sure everybody will have a different opinion based on their own personal experience.
Either way, we strongly recommend that if you are one for paying your credit card late, you change this habit and ensure that you make sure it is paid on time, and that you pay more than the minimum payment. You may not need finance today, but who knows what tomorrow brings.
Better to be safe than sorry.
