understanding credit rating

All of your credit rating questions answered

30 Aug, 2017

If the mention of a credit check instils a fear of dread in you, you’re not alone. For some reason, many people spend a lot more time worrying about their credit rating than is really necessary.

Ok, if you’ve had some financial trouble in the past you may find it comes back to bite you, but there’s a lot more to a credit check than looking at your previous repayment habits.

Once you understand what a lender looks at when they check your credit rating – and how this then informs their decision – you might be able to put your mind at rest a little.

You can see why lenders want to be cautious and fully assess your situation before loaning any money to you. They have shareholders and depositors to answer to, so a certain level of risk management is necessary.

 

Why do they check your credit rating?

When a potential lender is considering offering a loan, they will gather answers to several questions including:

How long have you been at your present address and job?

They’re looking for stability; if you have just moved or started a new job they will probably ask about your previous address/employer

How much income do you have?

Naturally, they need to make sure you have enough to meet the loan repayments

What kind of work do you do?

If it’s any kind of seasonal or unreliable employment, such as crop farming or commission-based selling, this could raise a warning flag.

What is your marital status?

A steady relationship is proven to make you a better payer

What is the value of your assets?

If you’ve managed to accumulate considerable assets it’s a sign that you’re less of a credit risk

How have you repaid previous loans?

A leopard cannot change his spots, so they say. A poor repayment history will count against you here

The lender will then analyse this information to decide whether you’re a safe enough bet. They will pay close attention to your credit history, and will contact your previous or current lenders to find out what kind of borrower you are.

 

Your credit history matters

What they really want to hear is that you always make your repayments on time without needing a reminder. If they get reports that you have missed repayments or always wait until the final notice is sent, they may be more wary about lending to you – you sound pretty high-maintenance.

As part of the credit check your lender will contact the credit bureau to find out what is on their files. Before a lender can access any of your personal information, they must first confirm their lender’s code and your name, sex, date of birth, driver’s licence number, occupation and last two addresses. This helps prove that they are authorised to carry out the check.

The credit bureau will ask what the application is for, and this will be recorded on your file. Then they will hand over all the information they have on you, including previous credit applications and delinquencies.

A delinquency on your file shows there has been some kind of problem in the past. These can include judgement, repossession, bankruptcy or the borrower ‘skipping’ – essentially running away from their debt by moving house and not providing a new address.

You’ll see that any applications for credit – whether eventually approved or not – are noted on your file. This means you should be careful about getting too many credit checks in a short period of time because they’ll all be recorded against you name and may affect your credit rating.

Once the lender you’re applying to has gathered all this information they should be ready to make a decision… good luck!

 

To sum up:

  • Your credit ratings needn’t be a mystery – it’s not too hard to understand what lending organisations want to check and why
  • The main point of a credit check is to assess your current financial situation and previous loan and repayment history
  • Elements of stability in your life, for example with your address, job and relationship, will generally be considered a plus
  • The lender will contact the credit bureau and your previous lenders to get an idea of your credit history and repayment records
  • All applications, regardless of the outcome, are recorded on your file along with any delinquencies

 

How can you find out your credit score for free?

If you haven’t already, create an account here. It’s simple, safe and 100% free to receive your credit score and comprehensive credit report.

 

home loan planning

Home loan tips for beginners

28 Aug, 2017

Since your home is probably the biggest purchase you’ll ever make, it follows that your mortgage will be the biggest loan you ever take out. If you put enough time and effort into understanding the details and making the right choices, you stand to create a good deal of wealth through property. Get it wrong and in a few years’ time you may be seriously regretting the decision. So what does it take to plan for your home loan?

 

Planning for your home loan: Fees, fees, everywhere

When deciding where to borrow from and what type of home loan to get, you’ll need to consider your deposit, your level of income and your overall cash flow. You also need to bear in mind that along the way you’ll be hit with all kinds of fees including mortgage costs, stamp duty, valuation fees, loan application fees, fees for the lender’s solicitor, mortgage insurance, and registration fees. When choosing a lender, make sure you know about their fees upfront so you can factor these in to your decision. The charges will vary greatly depending on the lender, the type of loan, the purpose of the loan and the amount borrowed, but you can expect to pay between around $750 and $4,000.

You’ll need to do some careful calculations for your own situation as low fees don’t necessarily equate to a better deal overall. If you’re looking at a 25-year or 30-year term, for example, you’ll probably be better off opting for a product with a lower interest rate and taking the hit on the fees. If, however, you’re only planning to keep the loan for a few years you might find it works out cheaper to pay a slightly higher interest rate on a deal that comes with very low fees.

 

Determining your deposit

Since the interest on your family home loan is not tax-deductible, you should aim to get your deposit as high as possible to minimise the interest charges on the amount you borrow. The faster you pay off the loan, the less you will ultimately pay in interest.

On a practical note, if you don’t have any kind of deposit, you’ll find lenders reluctant to deal with you. In their view, if you haven’t been able to save any money then it’s not a great sign that you’re in control of your finances and will be able to meet your repayments. Generally a deposit of 5% is required as a minimum, and you’ll also need the money for purchase costs up-front.

If you have less than a 20% deposit, it’s more than likely you’ll be charged for mortgage insurance. Sadly this doesn’t do anything to protect you – it protects the lender if you end up defaulting on your loan and your property has to be sold at a loss. Seems unfair that you have to fork out for insurance to cover your lender? Welcome to the world of mortgages.

The premium for this insurance will be between 1% and 3% of the amount borrowed and it will be added to your loan, meaning it will accrue interest. You should therefore avoid it if at all possible.

If you have a good level of income but are not quite at a 20% deposit, consider taking out a personal loan to make up the difference and aim to pay it back as quickly as possible. The cost of interest on the loan should work out to be less than the mortgage insurance you’d have to pay otherwise. Only do this if you’re confident you have sufficient income to service the loan and your mortgage repayments simultaneously.

 

Controlling your borrowing

Don’t just borrow money according to what your lender says you can borrow. Remember, they are operating a business and are in competition with other lenders for your money, so are not always acting in your best interests.

When it comes to calculating how much you can afford to borrow, first you need to work out how much you can afford to repay. The banks will use all kinds of computer programs that look at your top-level finances and then spit out a number – possibly a lot higher than you were expecting. But these programs only go so far in examining your personal financial situation. They don’t know whether your children are bleeding you dry as they go through university or working hard to earn a living, for example. A bank’s computer program won’t take into account your holidaying habits or annual memberships.

If you want to stay in control of your money, you need to create a budget which allows for all your other commitments and then shows you how much you have left to put towards home loan repayments.

Once you know how much you can afford to repay per week or per month, you can approach your selected lender to find out how much you can therefore borrow. Of course, the loan term and interest rate will have a big impact on the amount you can borrow.

 

Saving yourself money

As mentioned above, the best way to reduce the cost of your home loan is to pay it off as soon as possible (you can read about this in more detail here).  You shouldn’t just opt for a 30-year term because it’s the most affordable option – you’ll probably end up paying tens of thousands of dollars more in interest charges.

The table below shows how much you’ll need to repay either weekly or monthly depending on your home loan term and interest rate.

Amount payable to repay a $1000 loan:

 

10 years 20 years 30 years
Rate % Monthly Weekly Monthly Weekly Monthly Weekly
4.0 10.12 2.33 6.06 1.39 4.77 1.10
4.5 10.36 2.38 6.33 1.46 5.07 1.17
5.0 10.60 2.44 6.60 1.52 5.37  1.24
5.5 10.85 2.50 6.88 1.58 5.68  1.31
6.0 11.10 2.56 7.16 1.65 6.33  1.39
6.5 11.35 2.62 7.46 1.72  6.32  1.46
7.0 10.12 2.68 7.75 1.79  6.65  1.54
7.5 11.61 2.74 8.06 1.86  6.99 1.61
8.0 12.13 2.80 8.36 1.93  7.34 1.70
8.5 12.40 2.86 8.68 2.01  7.69 1.78
9.0 12.67 2.92 9.00 2.08 8.05 1.86
9.5 12.94 2.99 9.32 2.15 8.41 1.94
10.0 13.20 3.03 9.65 2.22 8.78 2.02
10.5 13.49 3.10 9.98 2.30 9.15 2.10
11.0 14.77 3.17 10.32 2.37 9.52 2.19
11.5     1 4.06 3.23 10.66 2.45 9.90 2.28
12.0 14.35 3.30 11.01 2.55 10.29 2.37

 

To apply this to your own home loan, first write down the amount of your loan in thousands (e.g. $120,000 = 120). Then select the number from the table above according to the interest rate, payment term and payment frequency (weekly or monthly). Then, multiply these two numbers together to reach your payment amount.

For example, to repay a $200,000 loan at 5.5% over a 20-year term, the payments would be $1,376 per month (200 x 6.88) or $316 per week (200 x 1.58).

This tool can be used even if you are mid-loan to see how much you’d have to increase your payments by to reduce your loan term. It’s never too late to start repaying a little extra to reduce the amount of interest due.

Once you know how much you can put towards a deposit and the amount you can afford to repay, you’re ready to work out which lender to use and what kind of loan is right for you.

 

To recap:

  • When taking out a home loan it’s important to put some time into planning and researching so you make the best choices. It’s a pretty significant purchase, after all
  • Be aware of how your lender’s fees can impact the amount you pay overall
  • Save as much as possible for a deposit to reduce the amount of interest you pay
  • You’ll need a minimum of 5% as a deposit but should aim for 20% to avoid having to pay for mortgage insurance – you may consider a personal loan to boost your deposit in certain circumstances
  • Stay in control of your repayment amount; don’t be led by what the bank offers but do your own sums and know how much you can realistically afford

Don’t know where to start with a deposit? Monefly can help you to track and monitor how your cash flow and savings are going so you will have that house deposit in no time! It’s simple and secure, sign up free today at: www.monefly.com

 

 

cash flow habits

5 Signs that you need to sort your cash flow habits

20 Aug, 2017

1. You’re always paying bills late

We’re all guilty of occasionally receiving a bill, putting it in that important ‘to do’ pile, and then forgetting about it until we receive a reminder. But there’s a difference between paying a bill late because it slipped your mind, and being unable to pay because you simply don’t have the cash flow. If you’re regularly falling into the latter category, and the overdue reminders keep piling up, your finances need some urgent attention.

 

2. You have a maxed out credit card (or two)

When it comes to paying off credit card debt, people come up with all kinds of ways to ‘play the system’, or so they think. You might use a cash advance from one card to pay the bill for another, or keep switching your debt to new providers to take advantage of introductory low rates. But unless you’re paying back more than is being added to your account each month in interest and charges, you’re not going anywhere (except deeper into debt).

It might be time to admit defeat, take those cards in your hand, and say goodbye for good with a pair of scissors. Then, you can really focus on paying off your card balance and saving yourself hundreds – or even thousands – of dollars a year in fees.

 

3. It seems the only way to pay your debt is with another loan

Don’t do it! Unless you’ve consulted with a financial planner to work out a debt consolidation strategy, you won’t solve your debt problems by getting into more debt. But that doesn’t seem to stop people from trying: a 2011 survey from credit bureau Veda found that 29% of people struggling with their existing debt commitments were planning to take out further loans in the next six months. Although it might temporarily stop the phone calls from your current loan providers, debt is still debt, and you need to get on top of the problem rather than just covering it up for a while.

 

4. Your personal savings are practically non-existent

You never know what might be around the corner in life. From unemployment to car repairs, we all face unexpected expenses from time to time, so it’s a good idea to have some savings to dip into in case of emergency. Although a lack of savings doesn’t necessarily mean you’re in debt, it does mean that you could easily be pushed that way if you had to fork out for something unexpectedly. And once you’re in debt it’s harder to build up your savings for next time. So if your savings are so small you need a microscope to examine them, it’s time to get committed to building up a bit of a reserve.

 

5. Your partner doesn’t know how much debt you’re in

Talking about money can be difficult for couples, and talking about debt even more so – when’s the right time to bring it up? Somewhere between the first date and the wedding night, probably. But if you’re hiding the truth about your personal debt from your other half, it’s going to make it much harder to pay it off. Having an open and honest conversation about your personal finances and cash flow means you can work as a team to put things right and enjoy a better future together without the shadow of debt hanging over you.

 

In short:

If you’re guilty of any of these things, it could be a sign you need to take control of your finances before things get any worse:

  • You’re always paying bills late due to cash flow issues
  • Your credit card(s) are maxed out
  • You’re taking out loans to pay off loans
  • You have next to nothing in savings
  • Your other half doesn’t know about your debt

 

Monitor your spending and keep track of your finances for free with Monefly today: www.monefly.com

 

setting financial goals

The importance of setting goals

11 Aug, 2017

As psychologist Denis Waitley once said, “The reason so many individuals fail to achieve their goals in life is that they never really set them in the first place.” For this reason, we believe that the importance of setting goals

 

Worth the effort

Goal setting is a powerful tool in wealth creation. There is a myriad of books and guides available which promise to help you succeed one way or another, but a common theme to them all is setting goals.

Another message of many self-help success books, including the internationally renowned The Secret, is the idea that you become what you think about. Set yourself goals you want to reach, keep them in your mind, and you stand a better chance of succeeding.

A 20-year study conducted at Yale University a few decades ago found that the one thing that set the top 10% of achievers apart from the rest was that they had clearly defined goals. And the crème de la crème of these were the ones who had actually written their goals down.

Are you convinced yet? Having goals is really important.

 

Setting financial goals

If you don’t set yourself proper financial goals, you’re not giving yourself anything concrete to work towards and you are, therefore, setting yourself up for failure.

But before you begin setting goals, you need to understand your current situation. This means assessing your levels of income and expenditure and taking into account your assets, income sources, and any dependents you have.

From here you can start to build up a picture of where you want to be in the future, for example being mortgage-free by 50 or being able to send your 3 kids to university.

It’s not enough to simply say ‘I want to be rich’; how do you define ‘rich’ and how will you know when you’ve reached that point in your life? If you want to read more about how to set sound financial goals for yourself, take a look here.

It’s important to be realistic during this process about what you really need. Becoming a multi-millionaire sounds good, but you shouldn’t aim for it just for the sake of status. Setting your goals too high will make them harder to achieve, resulting in a sense of failure when you could have felt satisfied with a lot less. Setting milestones along the way is a good way to keep yourself motivated towards your end goal.

 

Reasons people don’t set goals

If setting goals is proven to be so powerful, why isn’t everyone doing it?

There are perhaps a couple of big reasons, the first being lack of education. If you’ve ever taken a management training course you’ve probably been talked through the principle of goal setting, but were you ever taught about it at school?

The second reason is fear of failure. People are afraid to admit they’ve failed, even if the only person who knew about their goal was themselves. Better to plod along in life with no hope of achieving very much, because then you can never be disappointed.

The thing is, you probably have at some point experienced the thrill and pride that comes from setting your sights on something and working hard to achieve it. Whether it was passing a particular test or saving up for a new car, try to think of at least one example in your own life.

Reflect for a moment on the sense of achievement you felt then, and let that carry you through as you set and work towards your new financial goals.

 

To summarise:

  • Setting goals is an important part of achieving success, and it’s been proven that the most successful people write their goals down
  • If you want to reach financial success, you first need to define what ‘success’ looks like to you and work out how you’re going to get there
  • Make your goals specific and realistic; setting them too high means you’re more likely to fail. Milestones can be helpful too
  • Don’t be put off by the fear of failure. Focus on a time when you put your mind to something and achieved it. Now do it again!

 

Set goals and keep track of your finances with Monefly’s free automated tools today: www.monefly.com