We all know that the lending environment continues to be constrained but savvy property investors are still securing finance regardless of any additional hoops they may have to jump through.
The thing is, not only are they working with brokers to ensure their application has the best chance of success, they also have the discipline to keep their spending under control.
Unfortunately, that is not the case for the majority of Aussies, who continue to spend more than they earn every month – and generally do so by loading up their credit cards with bad debt.
Did you know that Australians owe about $45 billion on their credit cards?
Plus, half of us only pay off the minimum repayment every month.
According to the RBA, the average credit card debt is $2,000, so paying a paltry $40 a month means it will actually take 17 years to pay off.
And that debt will have ballooned more than $5,000, too!
Lenders have always assessed credit card limits as part of a potential borrower’s application, but today they are scrutinising spending more than ever.
They have generally upped the living expenses calculations and in some cases are even asking for transaction histories to see whether borrowers spend more than they think they do – which is true for many people.
Personally, I only have one credit card that has a limit of $2,000, and I pay off the balance every month.
By keeping the limit low, it increases my loan serviceability significantly.
However, I have seen too many examples of people who have multiple credit cards with combined limits of tens of thousands of dollars, which will not only drastically reduce the amount they can borrow but will also likely raise some eyebrows as a signal they have problems meeting their financial obligations every month.
Frequent flyer folly
Someone recently told me that they used their credit cards just so they could rack up frequent flyer points, which sounds good in theory.
The problem was they regularly overspent so they had no way of paying off the balance.
When you only earn one point for each dollar you spend, and it generally takes thousands of points to even fly one way from Sydney to Melbourne, the numbers don’t really add up to if you ask me.
I’ve even heard of people using frequent flyer points for an overseas holiday, but not actually having the savings for spending money so they finance the trip on their credit card!
It’s like some sort of bad debt roundabout that you will never be able to get off.
Now, I’m not saying that credit cards are intrinsically bad.
They can be useful in today’s technological age where cash has become a relic of a bygone era.
However, unless you can afford to pay off the balance every month, you should seriously consider whether you have the discipline to have one in your wallet.
If you find yourself confused when you see your credit card balance at the end of every month because you don’t how you spent that much money, then you may have a problem.
Of course, it can be fixed, by undertaking a comprehensive review of your finances and by developing a budget that you stick to like money glue.
The truth of the matter is that borrowers have always had to present a loan application as squeaky clean as possible – and especially in the current lending climate.
So, getting a grip on your credit card debt and spending is one way that you can improve your chances of loan success.
At the end of the day, you must consider whether frequent flyer points are worth as much as creating wealth through property investment?
Of course, you already know the answer to that.