Refinancing Debt: A Case Study

Struggling with repaying debt is not a nice position to be in but there are solutions out there.

According to the Australian Bureau of Statistics, the average Australian has more than $17,500 in personal debt – including outstanding credit card balances, car financing, personal and student loans.

As many of these debts could be accumulating a high amount of interest, it’s no surprise that many people look to debt consolidation tools to help them regain a financial foothold.

One of the most common forms of debt consolidation used by consumers is to switch to low or no interest credit cards (known as balance transfers). In the case-study below, we’ve highlighted how this could cause more problems than it solves.

Getting Out Of Debt Case Study

James¹ was just one Aussie struggling with a $20,000 debt across a couple of different credit cards. He was managing to repay over $500 most months, but was still having to make purchases on the cards. Some months he could only pay the minimum amount, and both cards were reaching their maximum limits.

He had considered a balance transfer to a low interest rate credit card but with the period to repay the loan being under 18 months before the interest rate reverted to a higher rate, he knew that it would be difficult to repay the debt in that time.

Instead, James settled on a personal loan with a non-bank lender. As his credit history was good, he was able to access a loan at the rate of 11.95%* (comparison rate of 12.84% pa) – significantly less than his current credit cards.

He borrowed $20,000 and was able to pay out his credit cards in full.  James now makes just one payment a month of $458, which he sets up as a direct debit, instead of multiple payments to different providers at different interest rates.

Over the five year term of the debt consolidation loan the total interest paid would be $6,861, compared to $11,472 if he had kept his $20,000 credit card debt and paid $529 a month towards both cards over the same period. That’s a saving of $4,661.

So, with a fixed-term loan James’ debt was covered every month, at a lower interest rate, and simplified through a repayment schedule. He says he’s going to put the savings towards a house deposit, or maybe a holiday.

Points to remember when refinancing debt:

1. Make sure that you are financially better off after all fees and interest rates when compared to your current credit card or loan.

2. Look for any potential ‘hidden’ fees. For example some personal loans may penalise you for early repayment, whilst some cards might issue a penalty payment if a minimum monthly payment is missed.

3. Shop around as different providers may offer better lending rates, especially if the borrower has an excellent or good credit score. But avoid making successive applications as this can negatively impact your credit report. Most non-bank lenders will offer a range of interest rates depending on the borrower’s credit history and meeting certain lending criteria.

4. Pay attention to potential changes in the lending industry for better deals. For example, the upcoming Comprehensive Credit Reporting reforms could mean a change to your credit score – which in turn could see you get a better interest rate for a loan.

5. Know where you stand on creditworthiness by checking your credit score. WisrCredit is the only site in Australia where you can get your credit scores from the major credit reporting bureaus in one place. It’s free, won’t impact your credit score and gives you the most comprehensive view of the financial you. Compare your scores with WisrCredit here.

1. His name has been changed for privacy reasons

Disclaimer: This article contains general information only, and is not general advice or personal advice. Wisr Finance Pty Ltd does not recommend any product or service discussed in this article. You must get your own financial, taxation, or legal advice, and understand any risks before considering whether a product or service discussed in this article may be appropriate for you. We have taken reasonable efforts to ensure that the information is accurate at the time of publishing, but the information is subject to change. We may not update the article to reflect any change.

* Comparison rate(s) based on $30,000 unsecured loan, fixed over 5 years, with monthly repayments. WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

How To Improve Your Financial Health

Knowing where to start and how to improve your financial health can be challenging but following these steps can set you on your way to financial wellness.

Your credit score is a mirror of your financial position. Getting money smart may not only help your credit score but also set-up good money habits that can last a lifetime.

Like most habits, the secret is to keep it simple and do it often. Below are some Wisr tips that can go a long way to helping kick-start your financial wellness.

1. Spend less than you earn

It sounds pretty simple, but it can be easy to spend more than you earn. Create a budget that lays out what your in-comings and outgoings are. It will allow you to see exactly where your cash is going each month. Don’t worry if you’re not a whiz with a spreadsheet though – there’s plenty of apps available to download that will guide you through the whole process.

2. Reduce high interest debt

According to a Wisr survey, one in four Australians are financially stressed. The biggest contributor being high interest credit card debt. A wise first step is to look at all the debt you are paying and prioritise paying off the highest interest first. If you can’t pay off outstanding balances across multiple cards and loans every month, a debt consolidation loan is one option to get back control.

If you do have a credit card, make sure its suitable for your needs and provides you good value. For example, it may not be worth the extra rewards points if you’re paying interest rates at 20%.

3. Build up your nest egg

While retirement can seem like more than a lifetime away (particularly at 8:30am on a Monday) it’s still something you need to prepare for. Australians are living longer and healthier lives, which means you may need more money put aside for when the time finally arrives.

You could be making non-concessional contributions to superannuation or putting a little bit of your salary in the bank each pay day to improve your financial position. This not only gives you the chance to reach your lifestyle goals later in life, but also build good financial habits today.

4. Know what you’re worth

Financial wellness is about making sure you get a smarter, fairer deal. Understanding your credit score is the first step in achieving this.

It means youʼll be well informed about your creditworthiness before you apply for a loan or credit card. And more importantly, now that you understand your credit score can change over time, you’re able to perform that financial health check more regularly.

So make sure you get Wisr and get your credit scores today – it’s free and the most comprehensive tool of its kind in Australia.

 

Disclaimer: This article contains general information only, and is not general advice or personal advice. Wisr Finance Pty Ltd does not recommend any product or service discussed in this article. You must get your own financial, taxation, or legal advice, and understand any risks before considering whether a product or service discussed in this article may be appropriate for you. We have taken reasonable efforts to ensure that the information is accurate at the time of publishing, but the information is subject to change. We may not update the article to reflect any change.

Seven Wisr Ways To Improve Your Credit Score

There’s always room for improvement when it comes to keeping your credit health in check.

Yep, even a great credit score can be improved! We’ve come up with seven helpful tips to help you stay on track and improve your credit score.

1. Keep your credit applications on the down low

When it comes to shopping around for a personal loan, getting the best rate is an important factor for many borrowers. When you make a credit enquiry for a loan or a credit card it is recorded on your credit report, even if you don’t follow through with the application.

Submitting several loan applications to multiple lenders with the hope that one will be approved could be detrimental to your credit score.

To help reduce your risk, you should consider the “six-month rule”, meaning that you try to limit yourself to just one or two credit enquiries every six months. It is also worth using online calculators and services which won’t impact your credit score before submitting a formal credit application.

2. Pay your bills on time

Even the most organised people sometimes forget to pay their bills on time. Late payments for bills over 14 days for credit cards, personal loans, auto finance and mortgages going back two years can have a negative impact and lower your credit score.

It is important to always pay your bills on time and if there ever is a problem, make sure it is paid as soon as possible and keep the company informed about your circumstances to avoid having a default listed on your credit file.

3. Avoid defaults (overdue debt) at all cost

If you are overdue on a payment that is more than $150 and you have been given notice of the intent to default, this is serious and could result in a formal default being recorded on your credit file for the next five years. This record could also stay on your file, even if you subsequently pay off the amounts overdue.

If you’re struggling to pay your bills or meet your regular repayments due to unexpected circumstances, it’s best to contact the Biller or credit providers and see if you can apply for a hardship variation and negotiate a repayment plan.

4. Review your credit report regularly and correct errors

You are entitled to obtain one free copy of your credit report per year from each of the major credit reporting bureaus (Equifax, Experian and Illion). Even if you believe you do not have any negative information on your file, it is still wise to check it, as there could be errors.

If any information on your credit report is incorrect it is important to fix it straight away otherwise future credit applications will be affected.

Check out the WiserCredit Bootcamp on how to take control of your personal credit file.

5. Keep an active credit account

No, we’re not recommending you go on a huge shopping spree. But it’s actually a good thing to have a proven credit track record that shows you can meet repayments of any credit outstanding, including mobile phone plans, an internet account, utility accounts even a personal loan or credit card.

As long as you are managing your debt well and meeting all your commitments, this demonstrates to lenders that you may be a worthy credit borrower and may even help increase your credit score over time as long as you consistently manage your finances well.

6. Consolidate your debt

When you try juggling too many repayments for multiple debts, this could lead to missing payments or worse not having the sufficient funds needed to cover the payments that fall due. Reducing your debt may be helpful to your credit rating in the long run.

If your credit file is free from any negative listings and defaults, then your bargaining power may lead to a lower cost way of managing your debts. Consolidating several loans or credit cards incurring high interest rates into one lower interest rate loan may be a wise thing to do.

7. Know what counts on your credit file

It’s more than just credit cards and loans that affect your credit file. Taking out a new phone plan or connecting to a new utility company could impact your credit report, as these companies may make enquiries about your creditworthiness.

It’s also important to know that not all enquiries are treated the same way. For example, a short-term loan (also known as pay-day loans) or car finance may be seen as riskier to a lender than a home loan application or new electricity connection.

Disclaimer: This article contains general information only, and is not general advice or personal advice. Wisr Finance Pty Ltd does not recommend any product or service discussed in this article. You must get your own financial, taxation, or legal advice, and understand any risks before considering whether a product or service discussed in this article may be appropriate for you. We have taken reasonable efforts to ensure that the information is accurate at the time of publishing, but the information is subject to change. We may not update the article to reflect any change.