Applying for a loan with plastic debt

I AM paying off a credit card which has an amount of $7500 owing. Although I am required to pay a minimum of about $160 each month, I am paying $500. I would like to know how this affects my credit rating. If I am making regular payments at above the required amount, will this work in my favour?

My partner and I are applying for a loan as we are purchasing a property together. He already owns a place and will try applying on his own, but apparently the bank may ask to see my papers – payslips etc – and may require that I sign on to say I will assist in paying. Will they see my credit history even though I am making regular repayments? My partner is not aware of the credit card (I do not use this anymore and am just paying it off to erase the debt).

Financial planning expert Gary Lucas writes:

Your question delves into an important area, particularly as we emerge from the global financial crisis. Prior to the GFC, banks were lending freely – indeed in the United States this was one of the contributing factors to the crisis.

The days of the NINJA loans (No Income No Jobs or Assets) in the US are hopefully well behind us.
While we never did get to that point here in Australia, the banks were very welcoming. Now the story is different.

Banks are a lot tougher in applying their lending criteria. This means your credit history is very important. Banks want to know what risk they are taking and whether someone poses so much risk of default that they should not be lent money.

It is important that you pay at least the minimum on the credit card each month and that you pay it before the due date. If you do not meet either of these criteria then it will negatively affect your credit records.

It is not of matter of saying, "I was only a few days late or a few dollars short". The fact is that you will not have met your requirements and it will be recorded, and most likely used against you. There is no room for errors or excuses.

Ideally you should clear the card in full. Is there any way you can do this? Is there something you can sell? Can family help? I acknowledge that involving family is risky as it can lead to problems, but you could pay them the $500 per month and possibly more.

The interest cost on the credit card, even though it appears a small amount each month, will be a high percentage rate. The banks are happy for you to pay the card off slowly as this is how they make money and very good money it is for the bank. So while paying a regular amount before the due date and in excess of the minimum will not harm your credit history, it is not a good use of your money.

Your credit file records all of your credit activities for a period of seven years. This would include your credit card and any other finance that you have applied for. It will also record any late payments which is why I stressed the point above about meeting the repayment requirements of the card.

When the loan is applied for and as you are a party to the loan, the bank will want to check your credit history. However, this cannot be done unless you give permission. This will happen when paperwork is given to you to sign. The important thing here is to know what you are signing. Once the bank does a credit check, they will see that you have a credit card, the limit and if you have met your repayments as required.

An important point to note is that the bank is not interested as much in the balance of the card, but the limit. This is because the limit is the available credit that you can borrow.

Five hundred dollars per month is a big gap in a budget and there may be an expectation for you to contribute more than what you are able to. You should consider whether your partner should know about this. Along with the issue of full disclosure is that of whether a better outcome could be achieved between you.

You could add the balance of the credit card to the home loan and consolidate them into one loan. Then you could use the $500 per month that you are currently paying off the credit card and pay off the home loan instead as an extra repayment. I suspect this may be possible as your partner already has a property and hopefully has enough equity to borrow a little extra to include the credit card debt.

The interest rate on the home loan would be far lower than the card and the extra $500 per month would make a big difference to the term of the home loan and the interest that you would pay.

Where to find out more

Answer this week provided by Gary Lucas from MG Financial Planning, a member of the Financial Planning Association. To find a financial planner, call the Financial Planning Association on 1300 626 393 or visit www.fpa.asn.au.

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