There is no national credit score system in Australia that is magically linked to your tax file number (or anything like that). There are three main credit record agencies (or credit bureaus) in Australia: Equifax, Illion and Experian. Each bureau may have a record of you and their own profile from which they assess and produce a score for you. Generally, your record with these bureaus has your current or most recent home address (as well as previous addresses), date of birth, full name, and so on.
Credit providers such as banks, electricity companies, phone companies, other utility providers (or anywhere that you borrow money or are on a use-now-pay-later account, such as an internet plan) may choose one, two or all bureaus to work with. For example, if you didn't pay your phone bill on time, it's possible only Illion got a notification, placing a negative mark on your ‘credit’ file.
When applying for a loan or mortgage (remember that you won't be applying for any consumer debt going forward!) the credit provider may sweep one or all of the bureaus to gather data about your history of repaying money. At this point they will make their own judgement and assess how creditworthy you are.
Let me repeat that: banks and lenders don't have access to a central credit score government-owned database … these bureaus are non-government (i.e. private companies).
So what does this mean? It means that the proposed credit provider (e.g. for a phone plan or home loan) will gather credit information from one or all of these companies and build their own credit profile on you. This means there is no huge issue with your specific ‘credit score’. I live and breathe personal finance daily for a living and I honestly don't know what my ‘made-up score’ is with any of the bureaus. I don't let this myth run my life.
Bottom line: the best thing to do regarding your personal credit history is to pay your bills on time and have cash in the bank!
BNPL: Afterpay, Zip Pay, etc.
Make no mistake: if you possess or use a product or service before you have paid for it, you have a debt. No matter how cute the marketing is, no matter how good the app is, no matter how nice the technicalities of the product are.
At the time of print, the buy-now-pay-later (BNPL) industry isn't regulated. What does that mean? It means the Afterpays and Zip Pays of the world are not governed under any consumer credit laws in Australia. This is because technically there is ‘no cost’ to the consumer to use this service, nor is there unlimited interest charged to the consumer (as there is for credit cards) if the consumer does not pay back the money.
After you read this book and implement a spending plan, build your financial foundations, and develop a great mindset, my hope is that you will look at BNPLs like I do. I look at them as a distraction, a joke, a modern-day ‘payday lender’ (google that one) — a company that is mainly profiting by making it attractive and easy for you to make purchases which can be paid over ‘four easy instalments’.
If it sounds like I am being critical towards these companies, it's because I am. I like how we live in a country that does allow freedom to innovate and I am excited to see what the future of money looks like and all that. However, these BNPLs are used for consumer spending so they use language that is inviting and fun: ‘four easy instalments — sign me up, baby!’ Note the sarcasm. Without regulation and with more competition from new players, these instalments will go out to 52 easy instalments, 100 easy instalments, and so on. Don't get me wrong, I understand that up to 75 per cent of these companies’ profits come from the fees they charge the retail stores to use them. If you want to support your local small business, don't use BNPL in their stores because they make less money when you use BNPL payment methods.
Let me get to it. Here are the reasons you should not use these services.
By using BNPL you are not learning how to manage your money. You should not outsource your diet to a shake, nor should you outsource your budgeting to a ‘credit provider’. Afterpay says the average purchase is $150. They are not clear on whether or not this is an individual item or a cart full of items online with the one retailer. If you honestly need to spread out $150 over four $37.50 instalments, I am sorry to say that you have bigger problems in your budget. Particularly if you are working full time. This will offend people as I have had people tell me that Afterpay has helped low-income people and people in a pinch. My comments are that the worst time to get into debt is when you are in a pinch.
Having payments in your life — even if they are interest free — ties up your cashflow budget and if your circumstances change a week after the purchase, you might not have the money to pay the remaining instalments and therefore have a penalty fee levied against you. This instantly means you have paid too much for the item.
‘It is not a debt.’ Tell that to a bank. If someone knows what is debt and what is not debt it's the bank. Please take note: if you are applying for a mortgage, banks and lenders will see these payments coming from your statement and use this towards any ‘credit profile’ they make of you, as I mentioned previously around credit scores.
While there are always the 1 percenters who have used Afterpay and Zip Pay to their benefit … blah blah blah … don't use this as an excuse to do the same. Stop using credit for crap and move on!
It is worth noting that innovation is truly a wonderful thing and we are in the early stages of digital money and payments. There could be some cool payment feature or system that comes out of all of this stuff (but probably not) — so I'll give the innovators some grace here. I will not give grace to the innovators who pitch to me to try and come as a guest on my podcast to advertise an app that allows people to get their salary paid in advance daily. Commonwealth Bank of Australia (CBA) recently launched a product like this called ‘AdvancePay’. I thought it was a legitimate joke at first. Are you kidding me? Yikes!
My point here is that when the motor vehicle was first invented it did not have seat belts. Regulators and society soon went out on a limb to say ‘seat belts are probably a good idea’. There was a lot of resistance and pushback from the motor vehicle industry at the time. And, well, the rest is history (and safer).
In a submission to Treasury on the regulation of BNPLs, Afterpay stated the following:
In summary, Afterpay is strongly of the view that the ASIC powers are not appropriate for the simple, no cost, short-term product offered by Afterpay which enables consumers to purchase retail goods or services.
Lol!
Loans from family and friends
I don't generally love this idea as it can lead to relationship breakdown. But if you do go down this road, ensure you write down the terms on paper and sign it in front of witnesses with your family/friends. When drafting the terms, consider factors such as the time frame for loan repayment, the exact dollar amount owed (total amount and the agreed repayment amounts) and other accountability/terms (e.g. if the loan is not paid back within six months, the borrower must re-finance with a personal loan). Make sure both the lender and the borrower have a copy of the written terms.
Debt and mental health
It can be tough out there and while we need to take ownership for our actions, I understand you might have been in a dark place for a season or you may still be going through a rough time. You may have racked up consumer debt because buying things is one way that you feel in control, settled or simply not depressed.
For the ‘overspenders’, and particularly those overspending with debt, I ask you to pause and
