The lure of free flights, hotel stays, or household goods can be very attractive when choosing a credit card, which is why many Australians elect to sign up for cards that promise points with every dollar spent. But these perks often have downsides such as higher levels of interest or honeymoon periods, after which the bonus points decrease or disappear altogether. So, while you may save a few hundred dollars on a holiday in the short term the long-term financial effects of chasing points or transferring your credit card balance to another card can cost you thousands and may even affect your ability to be approved for a home loan. Here’s how.
Your credit score
Your credit score is a value from 0 to 1000 on your credit file that gives lenders an indication of how likely you are to be able to service the loan you are applying for. The score is calculated based on a number of criteria based on your lending history and how well you have demonstrated that you are an ideal candidate for a loan through practices such as making payments on time.
Whilst Australian lenders consider the score they also review what drives the score such as multiple credit inquires for a 40+ year old. Verses a low score for a young person who hasn’t had a credit file for long. While you may not be rejected entirely for having a lower rating, you may not have access to competitive interest rates or credit products that more viable lenders do.
How can a balance transfer affect a credit rating?
Chasing points or transferring balances can affect your credit rating in both adverse and favourable ways depending on how well you manage the account. The worst thing you can do is apply for too many different cards within a short amount of time, but some of the other ways opening and closing credit accounts can hurt you include:
- tarnishing your repayment history if you get to the end of the promotional period for a balance transfer and you are unable to meet the regular minimum repayments;
- placing a number of rejections on your file, which tells potential lenders that you are not a viable candidate for a loan; and
- contributing to poor account conduct if you fail to close your old account once you have transferred your existing balance to the new account. This can also decrease the amount you can potentially borrow as it will appear that you have more credit available to you than you are really accessing.
Why is a good credit rating important when applying for a home loan?
When you apply for a home loan the lender will consider various factors relating to your personal circumstances including the ability to pay back the loan based on your income and history of paying back creditors. If you do not have a strong history with other creditors you can decrease your chances of being approved for a loan or opportunities to secure a loan with a competitive interest rate.
Is there anything I can do to improve my credit rating?
It can take some time, but it is possible to improve your credit rating so if you have been knocked back for a loan or advised by a broker that now is not the most suitable time for you to apply, there are some things you can do to bring your credit rating up to a standard that is more attractive to lenders. These include:
Not applying for new credit products, such as credit cards or loans too often, because each application will be recorded on your credit file; and
Reviewing the terms and conditions and eligibility of the credit products you do apply for to ensure you will be approved and not receive a negative record on your credit file. For more information speak with our finance team today.