Newspaper article The Daily Mercury (Mackay, Australia)

Borrow within Limits; Lenders Are Usually Willing to Lend You More, but Avoid the Temptation

Newspaper article The Daily Mercury (Mackay, Australia)

Borrow within Limits; Lenders Are Usually Willing to Lend You More, but Avoid the Temptation

Article excerpt

SALESTALK

with Vikki Berardi

Mortgage holders may have breathed a collective sigh of relief this week when the Reserve Bank of Australia again cut official interest rates. But it's essential to keep an eagle eye on your personal borrowing capacity and ability to manage debt. The economic headwinds that lie ahead are unclear and there's no room for complacency.

In fact, the 0.25-basis-point rate cut is an opportunity to review the state of your borrowings and debt repayment schedule. More than ever, you should avoid the following common borrowing mistakes:

Blowing out credit card limits

Credit card limits can shrink your borrowing capacity. Even if you've never used that $24,000 or $38,000 limit, some lenders view the amount as your total liability. A smart approach is to set limits low and use debit cards.

A strategy that works well for some couples is to put credit cards in the low-income-earning partner's name. It's one way to have the convenience of a credit card without creating a liability.

Stretching beyond your means

Don't blindly follow a lender's borrowing calculations. Only you know the actual state of your household finances and what kind of safety buffer you need to sleep at night. When lenders say they will lend you X amount based on your income, always factor in what could happen if your circumstances change and consider borrowing a lesser amount.

The investors and home owners who get into financial strife are almost always those who've borrowed to the hilt because a bank or finance company allowed them to do so.

Not preparing a budget

Although it is important to borrow within your personal means, there's nothing to stop you trying to increase your borrowing capacity. The caveat is that you need to be confident you will be able to comfortably service the new level of debt. …

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