This is part one of Nicole Pedersen-McKinnon’s strategy to ‘safeguard your score’, for tighter economic times. Part two: The 5-step strategy to safeguard your credit score when money is tight, tomorrow.
I see it time and time again at the moment: financial ‘slippage’.
The average mortgage repayment is up by almost $500 a month, in just the past three months (based on a $611,158 average home loan).
And the reason is that the cost of everything else is skyrocketing; inflation in the economy has spiked to 5.1 per cent and there is talk of it going to seven per cent.
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Petrol, in particular, hurts.
Your money is probably suddenly, severely stretched… and that’s where the slippage comes in.
Perhaps you are letting your ‘deadlines’ slide. A utility you leave unpaid for a week or two longer… a mobile phone instalment you instal a bit later… a credit card minimum you miss this month.
This. Is. So. Dangerous.
It is also easily – and I don’t say that flippantly – avoided.
And you need to avoid it because if you delay-pay bills, it has the potential to ruin your credit score for years to come.
The big risk you take when you delay-pay
I understand that you may not feel able to meet all your repayments right now… I will get to what you should do about that shortly.
But be aware that “repayment history information” is now recorded on your credit report and feeds directly into your credit score.
With every repayment you miss, your magic money number gets sadder. And that equates to a more miserable future because you need it for everything from a new phone to a loan.
This happens faster than you probably realise, too.
For all credit and loan repayments – so contracts with a financial institution – you have only 14 days’ grace, after which you will get a black mark against your name for each month you are late.
What’s more, this will hurt your credit score for two years.
For all other contracts, think utilities and telcos, you have 90 days’ leeway.
However, a default then counts against you for five whole years.
Instead, as counter intuitive as it is, you need to confess to your bank and creditors before you miss a repayment.
The far smarter, better way
Some six months of home loan holidays were advanced at the outset of the coronavirus crisis and three months is on offer for flood-affected Aussies now.
In fact, on a case-by-case basis, dedicated hardship departments at every institution with which you hold a contract will offer you an ‘olive branch’.
According to the Australian Banking Association, this could look like:
A deferral of scheduled loan repayments, on home, personal and some business loans for up to three months
Waiving of fees and charges, including for early access to term deposits
Debt consolidation to help make repayments more manageable
Restructuring existing loans free of the usual establishment fees
Offering additional finance to help cover cash flow shortages
Deferring upcoming credit card payments
Emergency credit limit increases.
Sound pretty extreme?
Well, it used to be - there was no requirement to stop such an arrangement pushing down your credit score… so is affected your future big time.
How it used to hold you back anyway
Despite making deals, some providers were recording repayments as ‘late’ even though you had revised repayment terms.
And down went your credit score.
But new rules mean they can no longer do that.
Which means saying, out loud, that you will miss a repayment is today a far smarter move than actually missing it.
A new “financial hardship” designation will instead be recorded on your credit report, for only 12 months and this doesn’t factor into your score anyway.
So, you could be back on financial track in as little as a year.
Tune in to my column tomorrow for how new laws are supposed to protect you, how to make sure they do so and the four other steps to ‘safeguard your score’.
This is part one of Nicole Pedersen-McKinnon’s strategy to ‘safeguard your score’, for tighter economic times. Part two: The five steps to safeguard your credit score in tight times, tomorrow.