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5 huge money traps to avoid in the new banking era

This is the year to side-step these finance pitfalls. (Photo: Getty)

The big banks have been taken to task by banking Royal Commissioner Kenneth Hayne for their failing to act in the best interests of the customer.

And while banks have a responsibility to serve their customers, it’s been pointed out that consumers, too, could stand to be better-informed about their rights.

According to a piece for the SMH by finance commentator and educator Nicole Pedersen-McKinnon, here are five lessons consumers need to learn in this post-Royal Commission era:

1. Spending big before asking for money

Lenders have been whacked for lending money to people who haven’t been able to pay it back, resulting in a crackdown on responsible lending tests. This means the lender will be intensely scrutinising your expenses the three months leading up to your loan application… So start cutting them.

First home buyers are the worst offenders when it comes to tapping-and-going without looking at the final amount. An easy solution to this is to start tracking your spending.

2. Being lax about your credit score

The good news is: a new way of calculating credit, called comprehensive credit reporting or ‘positive’ credit reporting, has been rolled out among the big banks since 1 July 2018. This means your credit score will include ‘positive’ information, such as the type of credit we hold and payments made on time.

The bad news is you can’t afford to ignore your credit score anymore: every time you apply for credit or miss a credit repayment, your credit score will go down. So the more responsible you are with your money, the cheaper your interest rates will be.

Not sure where to start? Here are four tips to perfect your credit health.

3. Reducing your credit card limits

New rules that kicked in on the 1st of January this year stipulates those applying for a new credit card have to prove you’re able to pay off the entire credit card balance within three years.

It means that for new card holders, maximum credit card limits could be half of what they are for existing card holders.

So think twice before you move to cut down your credit limit.

4. Getting complacent about an interest-only loan

According to Pedersen-McKinnon, you shouldn’t have an interest-only loan for your home loan in the first place.

“You want to eventually pay it off, not pay a fortune in non-reducing interest to your lender… for nothing,” she wrote.

Once your loan expires, the current interest-only period likely won’t be renewed – you could even be denied a time extension – and the repayment jump could be as high as 63 per cent. So start paying down your loan – now.

5. Posting updates on social media that could interest an insurer

The banking Royal Commission gave us you-can’t-make-this-up case studies of customers who were denied payouts by their insurer because of some innocent detail on their social media profiles.

It’s something to be extra-wary about when you’re applying for an insurance application. So think twice before before you hit ‘Post’ on that photo or Tweet.

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