Episode 3. Being Credit Healthy

00:00:00:00 - 00:00:26:12

This podcast is for education and entertainment purposes. It's not financial advice and doesn't take into account your objectives, financial situation or needs. You should consider if the information in this podcast is appropriate for you and contact a professional financial adviser. If you are seeking financial advice. Hello and welcome back to the Health Professionals Bank Better Money Management Podcast, where we bring you the information, tools and tips you need to boost your financial wellbeing.

00:00:26:17 - 00:00:47:08

Get the most from your pay and work towards the life goals that matter most to you. I'm Alan Moore from Health Professionals Bank. And joining me again today is Betsy Westcott. Betsy is a certified money and financial wellness coach who's dedicated her career to helping people make the most out of their money. She believes the more skill and knowledge we have around money, the better choices we can make to live a happy, independent life.

00:00:47:10 - 00:01:08:21

The greatest wish is that every Australian enjoys financial well-being. Hi, Betsy. Great to see you again. Hi, Alan. Good to see you again, too. Before we get started, we'd like to acknowledge the traditional custodians of country throughout Australia and their connections to land, sea and community. We pay our respect to the elders past and present, and extend that respect to all Aboriginal and Torres Strait Islander peoples.

00:01:09:01 - 00:01:36:10

Today we're going to be talking about credit and why. Why being and staying credit healthy is so important and what it actually means to have good credit health. Over to you, Betsy. Thanks, Alan. Well, you know, our credit health is probably something that we don't think about very often, but understanding how to be credit healthy is super important for our financial well-being, and it really influences our ability to achieve particular life goals, especially things like buying a car or owning a home.

00:01:36:12 - 00:01:53:15

Why? Because our track record with the credit can really affect our ability to borrow and determine how much we can borrow. If it's if it's really good or if it's really bad. Look, I think that's really important for our listeners to understand. So let's get straight into it. First off, can we talk listeners through what being credit healthy actually means?

00:01:53:19 - 00:02:17:22

Hmm. It's talking about having a healthy relationship with credit. So using the right type of credit for the right purpose and not going beyond our means, not over borrowing and extending ourselves beyond our capacity to repay. So that is kind of high interest rate credit cards that can really hurt. Oh, yes, they can. They're very expensive and they can also face along with them as well.

00:02:17:22 - 00:02:51:04

So and these things can really add up. So something like, for example, Buy Now Pay Later. That seems like a very cheap, inexpensive form of credit. But they also have very high fees associated with them. And when they stop being added, it suddenly becomes a very expensive form of credit. And if we don't stay on top of our debt, be it something like a buy now, pay later or a credit card, which has quite a high rate of interest, these things have a way of building up quite quickly and can send us into what we call a bit of a debt spiral, which really hard to dig ourselves out of that.

00:02:51:06 - 00:03:08:11

And once you there, like I said, the interest adds up, the fees add up, the interest adds up, and it can be really challenging to not only meet the repayments but get ahead of them. And that can keep us trapped in these debt cycles for a long time. Yeah, yeah. But that's not sort of the only thing we need to be mindful of it when it comes to credit either, is it?

00:03:08:13 - 00:03:36:13

No, that's right. We might also realise that our credit habits now can have a big impact on our future in that things that we're doing today might not really seem like they matter to us. But then down the track, when we go to buy a home or even get a new mobile phone plan, if we've not behave so well with credit in the past, that can come back to haunt us and make it difficult to get a loan or make it expensive to get a loan or prevent us from getting things like mobile phone plans.

00:03:36:15 - 00:04:02:10

And the reason is, is that the way we manage credit when we borrow money, how we behave with it, whether we pay it back on time, things like that, that affects this thing called our credit report and our credit score, which is what lenders and anyone who has opposed pay contract with us, such as like a home phone bill, that's what they look at when they're deciding whether they want to extend a contract or extend a loan to us.

00:04:02:10 - 00:04:30:23

And it tells them basically how likely and how willing are we going to be to pay back the money that they extend to us. So this could actually be the difference between actually getting a home loan and getting into our dream home or not. Exactly. Or a credit card or a car loan. In fact, Geri Cremin, who's the credit reporting expert at Credit Smart, says that when it comes to applying for a credit card, personal loan or even changing your mobile phone provider, your credit report can really make or break things for you.

00:04:31:00 - 00:04:54:20

I think this topic is going to be really interesting for our listeners. So let's dive into it right now. Let's talk through what is actually a credit report and a credit score. Yeah, it's a bit like a report card. It basically has information, both positive and negative, about your credit history. Every Aussie has a credit score and it contains this kind of overall rating that that you get.

00:04:54:22 - 00:05:10:23

So it's kind of like those rideshare ratings that that I hear a lot about. Yeah, it's kind of like Uber rating. But for finance, it's rather than saying whether you're like a good passenger or a good driver, it's saying, are you someone who behaves well with credit? Do you pay your bills on time? Do you pay it back?

00:05:10:23 - 00:05:29:08

Have you done anything naughty with it in the past? Walk and see what's really important then. So what does a high school mean? Does that mean you always pay your credit card off in full every month? Is that an example of what a high credit score would be? Yeah. Well, that's very good. Start paying your bills in time and in full.

00:05:29:10 - 00:05:53:01

It can also say, like, how much credit have you borrowed in, particularly in the last two years? So everything from credit cards to your mobile phone plan to any personal loans that you might have or a home loan, it says how often you've made inquiries, how much you've borrowed, whether you've paid it off on time or early or late, if you have any late payments or missed payments.

00:05:53:01 - 00:06:12:06

That's going to be recorded on your credit score and it's going to negatively affect that. So it's a real sort of history of how you behave with credit. So like many people I've applied for loans and I haven't gone through with it or I haven't got the loan. Does that sort of stuff come up on your credit history as well, whether a loan has been approved or not, whether you've even taken it out?

00:06:12:08 - 00:06:46:00

Yeah, it can. It can be a bit of a warning sign to a future bank or lender to say that if they see that you're applying for credit regularly, that can be a bit of an alarm bell for them. So every time you make an inquiry that goes on your credit score and it sort of stays there for the last five years, along with, like I said, any missed payments late payments, or if you've defaulted on any loans or, you know, one that I've seen catch a few people out is they'll be they'll have a utility bill in their name when they're in a share house and then they move out and they forget to

00:06:46:02 - 00:07:03:01

transfer the bill to someone else and then they don't pay it and it ends up going as a default on their record. So things like that can catch us by surprise and then have a really adverse effect to us down the track. So that example, they've moved out, they've got a different address. They might not even know that they've got a something wrong with their credit history.

00:07:03:01 - 00:07:32:20

How can I actually get the report and see it themselves? Yeah, so we can we all have access to our own credit reports and you can get a free copy of your credit report once every three months. There's agencies like illion Equifax and Experian Australia, and they will provide you a free copy of your credit report. Also, if you want to find out how to contact a credit agency to get a copy of your credit report, just type in credit reporting into the health professional banks website and they'll show you how to do it there.

00:07:32:22 - 00:07:53:19

So once you get a number, how do you actually know if it's a good number or a bad number, an ugly number, what the credit scores look like? Yeah, you get there, but you're like, what does this mean? So basically they'll give you a school somewhere between either zero and 1000 or zero and 1200. And basically the higher the number, the better.

00:07:53:21 - 00:08:19:02

But I will say that the average Australian school is around 625 or 699, just depending on which agency it is. I will tell you something, a little personal story. I was one day just casually checking my credit report and I saw some credit applications that I was not aware of and what had happened. I rang up the agencies that they were with and someone had attempted to steal my identity and open accounts in my name.

00:08:19:02 - 00:08:42:16

So then I had to work with them and the police to kind of get those eliminated. So it's really good idea. That's my personal story, really good idea to check your credit score to make sure everything's in order and there's nothing, no anomalies on it. So you can check it, like we said, every three months. But I would say check it every 6 to 12 months just to make sure yours is on track and has all the correct information on there.

00:08:42:18 - 00:09:01:15

The average is 600. I'd like to know what the person who's got a 1200 credit score right now, are they like a unicorn? Do they even exist? I don't think they exist. Okay. So now we've got the credit report. We've got our credit score. We know that they can affect our ability to borrow. But do I need to start cutting up those extra credit cards that I've just got sitting in my wallet?

00:09:01:17 - 00:09:30:16

Yeah, look, not really. Not necessarily. Is basically the answer is not quite so black and white. So as a rule, credit in itself is not bad or good. And in fact, if you use it well, it can be a really useful tool for managing your cash flow and for wealth creation. It's the reason that people kind of get into financial difficulty with credit is when they are borrowing for the wrong reason, they're borrowing too much or using the wrong type of credit for their needs.

00:09:30:18 - 00:09:48:24

That's where it can go wrong. Look, the last couple of episodes we've talked about budgeting, we've talked about saving. So if we've got all that right, why what are some other reasons we might actually need to borrow? Yeah, well, we might want to buy something now rather than later. We don't want to save up for it. We might use it to manage our cash flow and timing.

00:09:48:24 - 00:10:10:03

So like a large bill, maybe it's like your car insurance comes in and you've got the money coming in in your next pay cycle. So there's a little bit of a gap and you're using credit to bridge that gap in terms of timing, or you might use it as a way to create wealth. For example, when you borrow money to buy your own home and then you pay it off over time or to buy an investment property.

00:10:10:08 - 00:10:27:12

And those are good examples of where credit can be an excellent tool. Look, we've all had a way, you know, our pay cycle and we're just outside of our pay cycle and just waiting for that next pie to come in. So, you know, people use their credit cards for cash flow to sort of get them across that line. Still okay to do that?

00:10:27:14 - 00:10:54:16

It's absolutely okay to do it and use credit in the short term to bridge the gap between now and the next pay cycle. I guess where it becomes problematic is when we're borrowing money to spend more than we actually have to be able to pay it back. So for nurses and midwives, especially if you're casual or if you're working different shifts week to week, managing that fluctuating cash flow can be really tricky sometimes.

00:10:54:18 - 00:11:15:09

So using a credit card is like a stop gap between bill due dates and your next pay check can be useful. What we don't want to do is fall into that trap where we're using credit as a way of supplementing our income to fund expenses that your regular pay just doesn't cover. That's the dangerous stuff. That's when you might need to come back to your budget.

00:11:15:11 - 00:11:35:01

Make sure you're spending less than you earn. And again, our budgeting episodes are a good one to go back to and check out for some handy tips, some really good points there. But there are there are a number of types of credit. You've mentioned credit card, also personal loans. How should I listeners be thinking about what type of credit to use or even if they should use it at all?

00:11:35:03 - 00:12:06:18

So there's some golden rules that you can follow when it comes to credit that will ensure that you have good, healthy credit habits. And that golden rule is match the life of the loan to the life of the asset. So what does that mean? Basically, if it's a medium term loan, like a personal loan, it's suited to something like buying a car or consolidating debt that you can pay off over a couple of years, a long term loan, like a home loan or an investment loan that suited to buying a home or an investment property that you're going to pay off over a longer period of time because you got to live in it for

00:12:06:18 - 00:12:32:19

a long period of time, hopefully. Yeah. And then you've got short term loans like credit cards. These are suited for smaller purchases or for helping with your cash flow. But again, it's for purposes that you can pay off pretty quickly and ideally within that interest free time period, which is usually about 55 days. Right now, if you've talked about, I think some great some great tips there around picking the right type of loan for the right purpose.

00:12:32:19 - 00:12:57:00

But we've still got to be careful about how much we borrow and how much we use that credit and how often we use that credit that we are spot on. The shorter the credit or loan term, the higher the interest rate is likely to be. And often the lower the value of the thing that we're purchasing with it, which is why we only want to use it in the short term and we want to be making sure that we're paying it off as quickly as possible.

00:12:57:02 - 00:13:20:15

The other things to be mindful of is it's not just the interest rate that we need to think about, but there's all those additional fees and charges that might come into play. So if there's a set up or an establishment fee for your loan, any ongoing fees and charges, any exit fees, any penalty fees, these will all add to the cost of the money borrowed, making the purchase of that, that thing or that asset more and more expensive.

00:13:20:17 - 00:13:38:10

We were talking earlier around the credit score the importance of that placing being able to get credit. But how do we actually keep that in good shape? What are some tips for doing that? Yeah, it's a good question that Allan and he's some of my top tips basically first things for us only borrow what you can afford to repay.

00:13:38:10 - 00:13:59:08

Sounds simple and it's some old wisdom, but it's true. And it works only by what you can afford to repay. If you have high interest debt that's kind of accumulated and is starting to get a little out of hand, then consider consolidating it onto a lower interest loan, like a personal loan that will save you money on interest.

00:13:59:13 - 00:14:18:18

It'll give you a structured repayment plan. It'll help you get out of debt sooner, which is always a good result. When you do borrow money, always try and pay it down as quickly as you can. And if you've got a large credit limit that you're not using, consider lowering it because if it's sitting there, it's tempting and it also can affect your ability to borrow and other things.

00:14:18:18 - 00:14:38:00

So keeping those credit limits as as low as you need them to be is another. That's a coping on top of that. Yeah. Smart move. And then beware of hidden fees and charges or highest interest rates that can accompany credit cards with like rewards programs and stuff. They might have these attractive rewards, but they cost a lot more in interest or in annual fees.

00:14:38:00 - 00:15:01:12

So weighing up the benefits of that, if you do have any loans, again, I've talked about automation a little bit here, but automating those repayments so that you never let you never miss one, Setting up SMS reminders to make sure you've never missed them is another great way to kind of ensure you're always on top of those repayments and not getting any defaults on your credit report.

00:15:01:14 - 00:15:29:16

What else would I say? I'd say don't have any unused credit limits or excessive credit limits. These can definitely impact your credit score. So like for example, if you have a $5,000 credit limit that you don't use, that can still affect your credit score. And it can as can sort of like, say, applying for multiple home loans, four different lenders having open applications or open credit can negatively affect your credit status.

00:15:29:16 - 00:15:43:22

So it's something else to be mindful of that. And then last but not least, just check it regularly. You know, you might get you maybe line it up with your dental check-up. When you go to the dentist, you check your credit score while you're in the waiting room at the dentist. Yeah, that's a good thing to do.

00:15:43:24 - 00:16:04:11

Okay. Thanks again, Betsy. Some great tips, as we saw earlier with our Budgeting and our savings podcast again today with our credit health. So that's really important to Thanks so much for joining us today and for all of the three episodes we've had in our Better Money Management series, my absolute pleasure. And I hope there's something that everyone can take away and implement to improve their financial wellness from the episodes.

00:16:04:13 - 00:16:24:17

And thank you for joining us today. We hope you enjoyed the third and final episode of our Better Money Management series. And if you haven't already had a listen, make sure you tune into our earlier episodes on budgeting and saving for more money management tips to help boost your financial wellness. And don't forget to check our website for more tools, calculators and resources to help you budget Better save and be healthy.

00:16:24:19 - 00:16:29:03

I look forward to catching up with you next time.