It is common knowledge that lenders assess a prospective borrower’s credit history, income and savings when they apply for a loan, but did you know that good account conduct is also considered?
With regulations surrounding financial institutions to ensure that they are lending responsibly, the assessment criteria is more frequently extending to how borrowers use their personal transaction accounts and whether those accounts are kept in good order.
With monthly subscriptions and other bills being drawn directly from personal transaction accounts it can often be hard to keep track of exactly what is being withdrawn or if there are enough funds available to cover the changes. So, how can you stay ahead of an overdrawn personal transaction account and when can an account balance in the minus lead to a decline by the bank?
When does a personal transaction account become overdrawn?
A personal transaction account can become overdrawn if a direct debit is made while the funds are not available. This is also referred to as an ‘unarranged overdraft,’ which means the bank has allowed, at their discretion, for a payment to be drawn from your account in good faith. This will typically occur on accounts with a strong history of deposits, such as accounts where a salary is paid, as the bank has determined that the account will not remain in the red for too long.
What happens if your personal transaction account becomes overdrawn?
If payment for a bill or other service has been paid out of your account and it is now in the minus you should aim to deposit funds into your account as soon as possible. If your account balance stays in the minus for too long, then this can raise red flags to a lender or even put you in further debt as the charges and interest on them accrue.
Be careful of fees
There may be fees attached to overdrawing your account. These fees may be a percentage of the amount overdrawn (similar to a credit card’s interest fees) or be a set fee that is applied per transaction.
Incurring fees on an overdraft can make it more difficult to get your account back into the black, which in turn can incur more fees and a non-payment or non-timely payment of the overdraft could result in a report on your credit report. When your finances are being assessed for loan suitability, the bank may consider you to be an unsuitable candidate for a loan due to poor account conduct.
Why does account conduct get assessed during a loan application?
Lenders are looking very closely at borrowers’ overall financial situations and will go through the previous three months’ worth of transactions on your account with a fine-tooth comb to determine your ability to service the loan. A bank will want to see not only that you have been saving and that you earn enough to cover the repayments, but also what you spend your money on and how much you will have leftover after making the mortgage repayments each cycle. This is to ensure that they are complying with responsible lending obligations and that you have enough funds to live off once the loan is re-paid.
Account conduct comprises the day-to-day transactions, how well the account is managed, any overdrafts or dishonoured payments that have occurred and any other account management issues they deem relevant to your application.
How can I improve or maintain good account conduct?
The best way to show your potential lender that you keep your personal transaction account in good order is to:
- create a budget that sets out exactly what your expenses are each month;
- diarise any direct debits; and
- ensure enough funds are available in your account on those days.
If you find there is a specific payment, such as your phone provider or private health insurer that does not fit in with your pay cycle, speak to the service provider to see if you can change the payment date to a more suitable day or week of the month that is closer to payday.
If you are still having trouble keeping on top of your account management you should assess your day-to-day spending to see what payments are sending your balance into the minus and where you might be able to cut back on spending. You can also switch off direct debits and opt to receive bills instead, which means you are in control of when payments are deducted from your account.
If you are about to apply for a loan, make sure you have not had any defaults, dishonoured payments or overdrafts in at least the three months prior to submitting your application, for the best chances of approval.
If you are thinking about applying for a home loan, speak to a mortgage broker in Cairns today.