Credit Cards - Are they really the work of the devil?

Hopefully the subject line made you take notice. If it did, then hopefully you will read on further. 

From my point of view it’s a far catchier headline than “ASIC makes changes to credit card rules” or “ASIC mandates changes in assessment criteria for Credit Cards”.

These two statements (or boring alternate headlines if you want to put it another way) are actually true. However, what you may not realise is the impact that they will have in terms of your ability to qualify for finance & meet loan servicing criteria.

In a nutshell, when assessing loan serviceability, Credit Cards are generally assessed using one of the following criteria:

3% of the total credit limit

A lender may not include it in their calculation if it can be demonstrated that the card balance is paid in full every month

The changes mandated by ASIC will effectively mean that serviceability of credit card debt will have to be assessed over a maximum 3 year period. If you have a card with a large limit (it is not uncommon these days to have a $30K-$50K limit) this could significantly impact your ability to borrow. These changes are happening soon:

1/1/19 for all new Credit Card facilities

1/7/19 for all other loans

So, that loan you applied for & qualified for in the last month may be the loan that you don’t qualify for in 2019. In the meantime your personal circumstances probably haven’t changed - you earn the same income, your living expenses are the same & your rent/loan repayments are roughly the same. When you thought you were good to go with that loan for the new car then maybe there may be a rude shock.

Now before you jump to conclusions, we at The Mac aren’t suggesting that the increased level of regulation isn’t a good thing. It is aimed at protecting the unwary & saving people from a lifetime of financial misery & credit card debt that can run into many thousands of dollars. What we are suggesting is that you look at your credit card limits & think of whether you really need them. A $10K card limit might well serve the same purpose as a $30K limit - if the purpose of the card is the “rainy day” or the card is repaid in full every month. This will also ensure that your future borrowing capacity is not diminished.

At this juncture I also need to stress that we at The Mac do not condone reckless lending practices. Our staff do not lend to a target nor do they receive bonuses based on the number of loans that walk out the door. We don’t offer a credit card as part of our suite of products. But what we do offer is what we think are some pretty damn good alternatives:

A VISA Debit Card - this provides all the convenience of a VISA Card for on-line shopping & cashless shopping (including Apple/Android Pay on a mobile device) without paying for the privilege of using someone else’s money

A range of loans for any worthwhile personal purpose. These start from (currently) 5.99% for a new car. Our loans will always end being more cost effective than that Credit Card at an interest rate of 20% or more

There are always alternatives. There are always different ways to “skin the cat” (though I can’t imagine “cat skinning” is a pleasant pastime!). Hopefully I’ve provided you with a little bit of knowledge on “How Stuff Works” in a financial sense. It might also be that “trigger” for a bit of a stocktake of your Finances.

Even if you aren’t up for that major purchase at the minute, at The Mac we can help with a financial stocktake. You don’t have to be a member to qualify for a stocktake but we’re pretty sure that you will want to become one afterwards. Come & see us in person, in one of our Branches or give us a call. If you can’t come to us we’ll come to you.

Until next time,

Paul Brooks