Spending too much on a ‘buy now, pay later’ app or running up debt on credit cards can stop young Australians getting approval for a home loan.
While interest rates are at record lows, the banks are still required to be strict when it comes to approving mortgages.
But consumers are set to have more borrowing temptations with PayPal next month launching a new buy now, pay later app to take on Afterpay, Zip Pay and Humm, along with a rewards-focused credit card.
Tax agent H&R Block chief executive Brodie Dixon said a bad credit score, from being in too much debt, was a surefire way to miss out on getting a home loan.
Spending too much on Afterpay or credit cards can stop young people getting approval for a home loan. While interest rates are at record lows, the banks are still required to be strict when it comes to approving mortgages. Pictured is Melbourne’s Bourke Street Mall
He had a message for ‘the younger demographic, especially those using credit cards and buy now, pay later services’.
‘What many young people don’t realise is that defaults on these payments may affect their credit score,’ he told Daily Mail Australia.
‘This can have lasting effects on their ability to be approved for loans in the future.’
Major lenders, including the banks, rely on data from consumer credit check firms Experian and Equifax for individual credit scores to determine if someone’s daily spending habits would make them a potential borrowing risk.
H&R Block issued the timely warning as American online payments giant PayPal announced they would soon launch in Australia a new buy now, pay later app to take on Afterpay.
Like its competitor, it will let customers pay for a good in four equal installments and only incur a fee if they miss a deadline.
PayPal this week also announced it would launch a new rewards credit card in Australia in July.
Instead of interest, PayPal’s new card with rewards has no annual fee but the catch is there’s 20.99 per cent interest.
Tax agent H&R Block chief executive Brodie Dixon said a bad credit score, from being in too much debt, was a surefire way to miss out on getting a home loan. He had a message for ‘the younger demographic, especially those using credit cards and buy now, pay later services’. Pictured is Afterpay’s Future of Fashion show
Interest rates for rewards credit cards with no annual fees
American Express Essential Credit Card: 14.99 per cent
Coles No Annual Fee Mastercard: 19.99 per cent
HSBC Premier World Mastercard (Rewards Plus): 19.99 per cent
BankVic Qantas Visa Credit Card: 16.95 per cent
Kogan Money Black Card: 20.99 per cent’
The Commonwealth Bank and NAB have since last year launched credit cards that charge fees instead of interest.
RateCity research director Sally Tindall said Australia was still home to 12.5million personal credit cards.
‘Credit cards might be on the decline, but they aren’t dead and buried,’ she said.
She urged consumers to be wary of a credit card offering rewards.
‘Australians love the idea of getting something for nothing but if there’s money owing at the end of the month, they’ll be hit with interest charges of 20.99 per cent,’ Ms Tindall said.
‘Earning rewards points without having to pay an annual fee can be an attractive proposition for diligent customers, but it’s not yet clear how many points customers will need to redeem rewards, so the devil could still be in the detail.’
Treasurer Josh Frydenberg last year wanted to relax responsible lending rules, enacted in 2009 during the Global Financial Crisis, requiring the banks to heavily scrutinise the daily spending habits of potential borrowers.
But last month One Nation leader Pauline Hanson indicated she would vote against government plans to deregulate lending, which would stop the Coalition proposal from passing through the Senate.
Fellow crossbenchers Jacqui Lambie and Rex Patrick are also opposed to watering down lending rules.
Major lenders, including the banks, rely on data from consumer credit check firms Experian and Equifax for individual credit scores to determine if someone’s daily spending habits would make them a potential borrowing risk. Pictured is a house at Strathfield in Sydney’s inner west
Mr Dixon said budgeting was the key to long-term financial security.
‘Managing your personal cash flow is one of the first steps towards financial freedom,’ he said.
H&R Block has this week launched a new MoneyHub online portal enabling customers to see all their bank accounts and credit cards in one place.
Mr Brodie said this free tool, which is yet to be developed into an app, would help young consumers reduce debt, boost their savings and see which expenses are tax deductible.
The 2020-21 financial year ends on June 30, in little more than two weeks.
Australian consumers, nonetheless, have been cutting back on their borrowing with Westpac’s Card Tracker data, based on its customers’ credit card transactions, this month falling to a new low for 2021.
Consumers in June were spending less than they did in January.