As we approach the silly season, it is wise to realise how your shopping habits can tip your credit history over the edge.

At this time of the year, when we are likely to spend more than usual on gifts, entertainment and travel, the allure of using easy money (such as credit cards, store cards and Buy Now Pay Later (BNPL) schemes) can be tempting.

The increasing trend and use of these easy money options is providing individuals with the means to make significant purchases without an immediate financial burden. So some tend to not pay too much attention to it.

Even if you are extremely disciplined to repaying on time, these services can turn your credit score into a larger burden than you may realise – especially if you are planning on purchasing larger items like a car or a new home.

This month, we would like to share a client’s story of how you may face unexpected challenges if you rely on easy credit. When you read this story, we hope it will become evident how this seemingly convenient approach to purchasing can have a lasting impact on credit scores.

Despite holding a stable job and residing at a long term address, this client found herself facing a credit score
of 420. A good credit score is typically considered to be 661 or higher.

Surprisingly her low score was not a result of missed payments or financial hardship but stemmed from her utilisation of easy credit options for major purchases. She opted for interest free loans and credit facilities to acquire essential items such as a new mobile phone, solar panels and air conditioning for her home. On similar credit facilities, she also purchased some white goods after a renovation.

Even her new laptop purchase was purchased through a store card provided by the sales outlet.

She had also been using services like Afterpay and ZipPay for smaller transactions, however she was very disciplined and ensured her payments were consistently made on time.

The unseen impact

Even though the client had a history of responsible payment, her credit score took a hit when she decided to buy a car.

The shock came when she discovered the interest rates for personal and car loans were hovering around 15%, solely due to her low credit score.

What seemed like a straightforward and financially
savvy decision to leverage easy credit for purchases had unwittingly become a stumbling block when seeking more significant finance.

The larger impact of this will be on her borrowing capacity at the time she wants to refinance or apply for a new home loan because the approved limits of all cards and BNPL schemes are considered and factored into loan serviceability.

The dynamics

The ease of obtaining credit through interest free loans and flexible payment options such as Afterpay and ZipPay create a false sense of security. While these services offer immediate benefits by spreading the cost of purchases over time, the impact on credit scores is often underestimated.

Credit scores are not solely based on an individual’s ability to repay debts. They are influenced by various factors including the type of credit used and the diversity of one’s credit portfolio.

The importance of financial awareness

This client’s experience underscores the critical need for financial literacy in Australia, especially concerning the implications of different credit options.

As a consumer, it is important to be proactive in understanding how your financial decisions can impact your credit score. Even seemingly innocuous choices can have far reaching effects.

Building a comprehensive understanding of credit and its nuances may empower you as an individual to make more informed choices that align with your long term finance goals.

The journey ahead…

For our client, the journey to improve her credit score involves a twofold approach.

Firstly, she is engaging in open conversations with her finance broker to understand the types of finance available and the impact they have on her credit score and borrowing potential.

Secondly, she is actively working to reduce her credit portfolio by using her credit card that has a 55 day interest free period instead of her BNPL and store cards. Once she has finished paying the final bills on these services she will delete her accounts.

When navigating the intricacies of the finance landscape, it is crucial to strike a balance between leveraging convenient credit options and maintaining a healthy credit profile.

Easy money, when used responsibly and with a clear understanding of its implications, can indeed make life more manageable. However, as this client’s story illustrates, the key lies in approaching easy credit with caution, armed with the knowledge of its hidden impact on credit scores.

If you would like to discuss how to use finance to secure your larger items like cars, boats, a new home or investment property, feel free to reach out BEFORE your credit history is jeopardised.

It is important to know that although your store cards and other BNPL schemes may have a zero balance it doesn’t mean they are closed accounts. Unless you actually cancel these services they will stay on your credit history as undisclosed credit when applying for finance for larger purchases.

Disclaimer: This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal,
tax or financial advice and you should always seek professional advice in relation to your individual circumstances. ©2024