interest Archives - Credit Simple

Why you should aim to be a ‘deadbeat’ – at least when it comes to your credit card

Credit Simple — Fri, 24 Jan 2020 05:06:19 +0000

Are you a deadbeat? When it comes to credit cards, that’s actually a good thing.

Yep, a ‘deadbeat’ is a term for someone who pays off their credit card in full and on time every month. Why a deadbeat? Well, if you pay off your card each month, the credit card company doesn’t charge you interest – so they won’t make any money off you. (Credit card companies also use the much more polite terms ‘non-revolver’ and ‘transactor’.)

A whopping two million Aussies fail to pay off their credit card balances each month, amounting to $7b in interest each year. And according to RBA statistics, a huge $32b was accruing interest on credit cards in January 2017 – that’s one month alone, and an average of $4,200 per card holder!

So if you’re not a credit card ‘deadbeat’ and you’re one of the many Aussies who owes money on a credit card, it’s a good idea to clear the debt as soon as possible. There are a couple of strategies many people opt for – such as a balance transfer, which means you switch your existing debt to a new credit card company and usually enjoy a 0% interest rate for a period of time. Or you can consolidate your debt into a lower interest personal loan and pay it off more easily.

“There are lots of reasons for people’s credit card behaviour, whether they pay it off in full each month or they carry a balance,” says CreditSimple.com.au spokesperson Emily Price. “Some ‘transactors’ like to use credit cards for their everyday spending so they can get the most out of rewards programmes and get extra treats. And some people simply don’t budget and end up using credit cards to get by.

“Whatever your situation and strategy, the best thing to do is pay off your credit card in full and on time each month, and try to see a credit card as a tool of convenience rather than an avenue for long-term borrowing.”

CreditSimple.com.au spokesperson Emily Price has provided her top tips that can help more Aussies earn the coveted deadbeat status.

1. Balance transfers

“Balance transfer credit cards, where one bank pays off any outstanding debt from a previous bank at a lower interest rate, can be a good option for some people,” Emily says. “Remember these offers usually only exist for an introductory period, so make sure you make the repayments while the low interest rate is still in place.”

2. Consolidate, consolidate, consolidate

“Consider consolidating individual debts into one low interest personal loan to make payments simpler to manage and minimise interest fees.”

3. The order is key

“Lay out a clear repayment plan, especially if you have multiple debts. As a rule of thumb, it is usually best to pay off debts with the highest interest rate first and you should look to wipe out your debts one at a time – even if that means starting with the smallest. Consider working with a financial counsellor or adviser who can help you consolidate your debts and work out the best repayment plan for you.”

4. Lower your credit card limit

“Measures like reducing your credit card limit, reducing the number of cards you have, or using a debit card can help to prevent overspending. If you do need to spend on your card, remember to make repayments on time to avoid negatively affecting your credit history.”

5. Create a budget

“This may seem like an obvious tip but creating a budget can help you identify any unnecessary spending or areas that could be cut back. Remember that it can take a little time to wipe debt, but you’ll be in the black much faster if you maximise your credit card repayment each month.”

Being a deadbeat (*cough*, sorry, ‘transactor’) has never looked better.

The post Why you should aim to be a ‘deadbeat’ – at least when it comes to your credit card appeared first on Credit Simple.

What home loan features do you actually need?

Credit Simple — Wed, 27 Nov 2019 01:00:44 +0000

Here is a list of the most common home loan features lenders offer with their home loans.

You might not need all of these features, so don’t overlook a loan with an attractive interest rate and fee structure for flashy features you might not even need.

With that out the way…

Here’s your list of home loan features

Offset account

An offset account is a transaction account linked to your home loan. The money in this account could offset the money you owe, meaning you’re only charged interest on the difference. Plus you can easily withdraw your money from this account if you ever need it.

Loans with offset accounts can sometimes come with higher interest rates. Sure you can save a lot in interest, but if you don’t plan on carrying a large balance in the account or you’d be tempted to spend the easily accessible funds, it may not be worth it.

Extra repayments

This is when the lender lets you pay extra on top of your normal agreed-upon repayments. It can help you pay less in interest and/or pay your loan off early.

But be aware that if you pay off a fixed-rate loan early, you may incur a fee called a break fee or break cost (break costs don’t apply to variable-rate home loans approved on or after 1 July 2011*).

Redraw facility

A redraw facility goes hand-in-hand with extra repayments. It basically lets you access the funds from your extra repayments if you need them down the road. If you haven’t made any extra repayments, you can’t get any money out.

There is sometimes a fee for withdrawing these excess funds, so you should only use this feature for emergency situations.

Repayment holiday

A repayment holiday lets you take a short break from making your regular payments if you’ve previously built up enough of a buffer through extra repayments. It will apply those extra funds toward your monthly repayments and it comes in handy during transitional times like starting a new job, having a baby, losing a job or retiring.

Fixed-rate loan

This is a loan where the interest rate doesn’t fluctuate with the Reserve Bank’s official cash rate. Lenders usually only offer fixed-rate loans for periods of 1-5 years, after which your loan will revert to the variable rate.

Fixed-rate loans often have higher-rates to start off with, and it’s usually more expensive to pay them off early. However, they do offer consistency.

Split-rate loan

A split-rate home loan is a feature that lets you split your loan into two loan products: a fixed-rate loan and a variable rate loan. This lets you enjoy the flexibility and additional features of a variable-rate loan while also benefiting from the stability and consistency of a fixed-rate loan.

Remember that your fixed-rate portion will usually revert to a variable rate at the end of your fixed-rate period, which will vary based on the lender.

Interest-only loan

If you need to reduce your monthly payments, some lenders will offer an interest-only payment for a short time (usually up to 7 years). That means your payments won’t be large enough to cover any of the principal, which is the actual amount you borrowed.

This is great for first-time buyers whose funds are tight and investors who want to minimise taxes. However, it means that you’ll pay more in the long-run so it’s not good to make a habit of it.

Low-deposit loan

Most lenders will pony up 80% of the home’s value, meaning you have to come up with the other 20% first. But some will offer low-deposit options and may give you up to 95% of the home’s value.

If you’re able to score a low-deposit home loan, you’ll usually be required to purchase Lenders Mortgage Insurance (LMI) that will protect the lender if you default.

If you think you can scrape together the rest of the deposit and you’re happy to enter the market a little later, it’s probably best to wait and avoid the extra costs.

Home loan portability

Home loan portability is a feature that lets you keep your existing home loan but transfer it to a new property. It’s an alternative to refinancing that can save you both time and money, although there may be some fees involved.

How to think about features

When comparing home loans, you should first identify the features that you absolutely need. For example, if you need a low-deposit loan because you only have 10% saved, then it doesn’t make sense to compare any loan without this feature.

After that, you should think of all the other features as nice-to-haves and decide if having any of these features is enough of a boon to counteract slightly higher rates and fees on loans that don’t offer them.

The information in this blog post is general in nature and does not constitute personal financial or professional advice. It is not intended to address the circumstances of any particular individual. We do not guarantee the accuracy and completeness of the information and you should not rely on it. Before making any decisions, it is important for you to consider your personal situation, make independent enquiries and seek appropriate tax, legal and other professional advice.

*https://www.legislation.gov.au/Details/F2019C00090

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In the habit of ‘whacking it on the mortgage’? Start treating it like any other debt (and get ahead)

Credit Simple — Wed, 12 Jul 2017 23:46:09 +0000

Need a new kitchen? Fancy that round the world trip? Just whack it on the mortgage.

In 21^st century Australia we extend the mortgage every time we have a bit of ‘spare equity’ built up. It’s like we’ve inverted the whole concept of borrowing and the aim of paying it off has disappeared out the window.

If you don’t pay that mortgage down as you would other debt, you could be forced to work until you drop just to pay the mortgage instead of retiring at 65 or 70.

If this is you, stop in your tracks. Before you extend the mortgage again to magic away your credit card debt, new car, kitchen, bathroom, holiday or even a new 3D TV, ask yourself some honest questions.

Honest question 1
Does that kitchen, bathroom or extension really add value to your home? We tell ourselves we’re ‘investing’ in a new kitchen, but we’re really buying a new kitchen because we want one. Have you ever seen anyone in an ‘Italian’ kitchen and bathroom shop with their spreadsheet to find out which kitchen bench would have the best return on investment? No they’re buying the bench of their dreams. What’s more, by the time they sell, that new kitchen will be well used.

Honest question 2
Does everyone really pay for their holidays on tick? No. Some people save up and pay up front for holidays. Slipped onto a standard principal and interest mortgage at 6 per cent, that $10,000 holiday snowballs into $19,329 over 25 years. That’s almost double the cost of the holiday.

Honest question 3
Is it really cheaper to put the car on the mortgage? It would be if the loan for the car were paid off in five years. The trouble is that typically Aussies add the car to the mortgage without doing the maths. Just like the holiday, a $10,000 car will cost you $19,329 over a 25-year term. It’s actually cheaper on a 12.99 per cent car loan paid off over five years. If you do that you’ll only pay a total of $13,649. If you do put it your ‘new’ car on the mortgage make sure the term for that part of the loan is just five years. Or here’s a radical thought: buy a banger for cash or keep your existing car.

Honest question 4
Will this really clear the credit card debt or making it easier to spend more? Sweeping the credit card debt onto the mortgage (aka debt consolidation) is sometimes sold to us as the panacea for our financial woes. If you can’t control your credit card spend, however, and aren’t willing to cut the card up, you’ll almost certainly end up in the doo-doo all over again and will slowly ratchet up your mortgage debt every few years.

Honest question 5
Am I really cut out to be a landlord? Extending the mortgage to buy a rental property or business is in theory a better financial decision than buying consumer goods such as kitchens, paying off the credit card, and blah-de-blah-de-blah. Good rental investments can make money. They can also be the ruin of you financially if the downturn comes just after you’ve bought or you’re beset by a host of other fish hooks. If you go in with your eyes open and the sums done that’s fine. Otherwise skip this step.

The antidote: paying down the mortgage

Whacking your spending and credit card debt on the mortgage is like dressing up in the Emperor’s New Clothes. Everyone can see that you’re naked except you because you’ve fooled yourself into thinking the spare equity in your mortgage is real wealth.

The reality is that life is a lot less stressful with a smaller mortgage noose around your neck. And if something comes along to trip you up such as illness, accident or divorce, you’ll be in a far better financial state to weather the storm.

You could treat that ‘spare equity’ as your retirement fund. Plenty of people who pay off their mortgages can move into a smaller home or cheaper location once they retire and live off the leftover equity.

So here’s the antidote. Treat your mortgage like you should do your other debt. Look for ways to pay it down – even one dollar at a time. Learn about the needs versus wants trap. Then track, trim and target. Finally fatten up your finances with the Three Naughty Things rule.

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