Introduction: In this series of articles I will look at the key elements involved in successfully obtaining your first mortgage. This article will focus on credit ratings and how to improve them to ensure that you don't fall at the first hurdle.
Alan Bond is most famous for two key events in his life: Bankrolling the successful bid for the 1983 America’s Cup (ending the longest winning streak in sporting history of 132 years) and his high profile business dealings, most notably his role in the WA Inc. scandals. The corporate collapse of WA Inc. was, at the time, the biggest of its kind in Australian history.
The rise of Alan Bond has always been a fascination of mine. How did this sign writer end up bank rolling an America’s Cup team and owning Channel Nine? Although the rumours that abound his life are numerous and the nature of who he was complex, one thing is certain: He started from humble beginnings, saw a meteoric rise to stardom and ultimately witnessed his business empire Bond Corporation collapse.
Bond’s first foray into business was a sign-writing company, but he really cut his teeth selling lots for development. It was said that he had such a skill for selling that he could charge twice as much for his plots as the ones next door. However rumour has it that he raised the capital and beat the banks the first time by borrowing funds and immediately paying it back, increasing the amount each time until he was able to borrow enough to buy plots of land. Whether this is true we will never know, but it's a good example in building credit!
Establishing a credit rating
The first step to establishing a credit rating is to set up a bank account and have your wages deposited into it. If you bank offshore into a currency account you may want to consider exchanging a portion of your wages each month and placing them into an account ashore. Lenders will always ask to see bank statements when first lending and you must ensure that your accounts represent your true earnings.
Once you have opened an account and deposited your wages you should then consider approaching your bank for an overdraft. You must remember the golden rule: Banks only lend to those who don't need it, so ideally you want to use your overdraft facility each month but pay it back immediately. You must never exceed your overdraft as this will have a detrimental effect on your credit rating.
Banks only lend to those who don't need it!
An overdraft facility will enable you to get a credit card. If you have been sensible with your overdraft facility you will be able to shop around for the best deals on credit cards. I would suggest looking at money supermarket to see who they recommend. Credit cards can be both the making of your credit rating or they can effect an end to it. When used correctly there are further benefits, such as gaining air miles and aviso points. It is also advisable only to have one credit card as multiple cards can also negatively affect your credit rating even if the balance on each is nil.
Credit cards will enable you to proceed on to being approved for car loans which in my opinion is the step below a mortgage. The finance company that you appoint for the loan will look carefully at your credit score and history. Once you have the loan in place this will further strengthen your credit rating. However caution needs to be exercised if you have too many outgoings per month as lenders like to see that you are not overstretched as this can have a negative impact.
If you were to approach your bank and ask them what your credit rating was they would decline to answer. This is why you have seen the advent of companies such as Experian. Lenders will accept Experian credit reports and these reports are a very useful tool for improving your credit rating. The reports published monthly enable you to quantify how financial changes to your personal banking improve your credit rating, for example closing a credit card or paying off an overdraft. The reports will also explain in detail which areas you need to improve on to increase your credit rating.
Stick to the terms
It is important if you ever receive parking fines, council tax or utility bills that you settle these on time. Local authorities will always be quick to instruct legal action and this is one of the most common causes of County Court Judgements (CCJ’s) which are very difficult to overturn. Legal action of this nature is always costly and has a negative impact on your credit rating so it is best avoided even if you feel that the penalty was not deserved!!
Unfortunately not everyone is blessed with financial common sense at a young age and so you may find yourself in your mid twenties with a bad credit rating. It is important before becoming too disheartened about such things to approach it pragmatically. Firstly it is advisable to speak with your bank manager and understand what they would require from you to start lending again. An Experian account will give you a clear idea of your credit score and how it can be improved.
Companies such as Ocean Finance have now launched a training credit card to help those who have bad credit improve this. These cards are worth considering but caution needs to be taken when using them as the APR is very high on them. Although, if managed correctly, they will help to rebuild your credit, but it is also worth looking at other avenues.
Credit ratings have changed a lot since Alan Bond’s time, but the same rules apply if you borrow money. You must stick to the terms and keep your repayments on time. It takes time to build credit but it can be lost within one fell swoop!
Any tax advice in this publication is not intended or written by Marine Accounts to be used by a client or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party matters herein.