Once, credit cards were the payment platform of choice for Australian consumers.
Today, Afterpay and similar ‘buy now, pay later’ payment options are fast making inroads – particularly among millennial consumers.
While both payment options have their pros and cons, it’s important to consider the implications of credit card debt and Afterpay debt if you’re planning to apply for a home loan – as one of the first things lenders do is assess your credit rating or credit ‘score.’
2021 was an extraordinary year in real estate across Australia, with a staggering 39% increase in property sales (based on total properties listed for sale on realeastate.com.au) compared to 2020.
Property sales don’t look like slowing anytime soon, and financial planners are increasingly receiving enquiries from consumers asking whether credit card debt or Afterpay debt will be detrimental to their loan application.
Generally, banks like people having credit cards. Why? Because they make more money when people use a credit card over a debit card (because of interest charges).
Credit cards allow consumers to spread out the cost of their expenses over time and give them flexibility in how much of the balance owing they repay. Although credit cards are a useful tool, this flexibility has contributed to poor debt outcomes for some consumers.
A report into Credit Card Lending by the Australian Securities & Investments Commission found that 18.5% of consumers satisfied one or more of the problematic debt indicators – and younger consumers had a higher overall incidence of problematic debt.
When applying for a home loan, banks and lenders may ask you about your regular expenses. This may include regular spending on Afterpay, to make sure you can afford your future home loan repayments. Source: Afterpay.
The message is clear: too much debt will not only affect your home loan application – but also your borrowing capacity.
So what to do?
First, before you finalise and submit a home loan application, consider:
Having a credit card is not bad, as long as you keep on top of credit card debt – particularly if you’re looking to real estate in the near future.
Launched in 2014 by co-founder and CEO Nick Molnar – a millennial himself – Afterpay has quickly grown to become the most popular ‘buy now, pay later’ platform – particularly with young people.
Its appeal is simple: buyers receive their goods immediately and then pay Afterpay in four equal instalments, a fortnight apart.
Where it gets dangerous is that it can be way too easy – and attractive – for consumers to keep on buying, and buying and buying….as Afterpay is offered online, instore or even at your favourite eatery or bar.
Opening an account is easy, there are no background checks and users who make payments on time are rewarded. This can lull consumers into a false sense of being on top of their debt, when in fact it may be spiralling.
Afterpay is a great option – used properly and with restraint. However, consider this:
If you’re thinking of applying for a home loan in the next few months – and want to ensure you are able to borrow as much as possible – it may be worthwhile considering ceasing ‘buy now, pay later’ payment options altogether.
Savvy shoppers who make timely repayments can enjoy interest-free buying experiences with both credit cards and Afterpay platforms. The secret is to monitor your spending and ensure you buy within your means.
Are you in your 20s or 30s and want to learn more about maximising your finances? MBA Financial Strategists have put together a great resource to get you started.