You might feel like you know your child or grandchild and their attitude to money like the back of your hand but how well do you know that of their partner?
Many over-60s have come a cropper when lending large sums to family members or going guarantor on mortgages for loved ones not because of their own flesh and blood but because they weren’t aware their child’s or grandchild’s partner had poor money management skills.
That’s why Graham Doessel, CEO of MyCRA Lawyers, recommends that older Australians ask to see the credit report of anyone they intend to loan money to or act as guarantor for – because it can uncover some surprising information, and even information the person being checked doesn’t know exists.
Your credit rating is a score that helps lenders know how risky it is to lend to you, and is calculated by credit ratings agencies based on your credit history, such as how many applications for credit you’ve made, how many loans you’ve held, whether you’ve made regular, on-time repayments and whether you pay your bills on time or have defaulted on them.
The higher your score, the better the risk you are judged to be, while a low rating may mean you have to pay a higher interest rate on credit or are denied credit entirely. Your rating, and your repayments history, is contained in your credit report.
Doessel says one in five Australians have default on their credit report and don’t know it.
“There’s probably no way you would see that information on someone else’s credit profile unless you sat down with them and had that person get a copy of their credit file, because you can’t check someone else credit file without their permission,” he says.
Doessel suggests having the conversation with your child or grandchild and their partner prior to making any financial commitments with them, so everything is out in the open. He adds that while having a default on a credit file is common and nothing to be embarrassed about, there are some types of defaults of which you should be particularly wary.
“Initial red flags would be a default of any kind [but] a court judgment or an enquiry with a payday lender like Cash Converters [is worrying],” he says. “Too many enquiries [on a credit file] in general makes it look like they’re desperate for finances, as well as any repayment history that’s recorded because that means they’re more than 14 days late with a licensed creditor like a bank.”
Doessel says that uncovering defaults on your loved one’s credit file or that of their partner doesn’t necessarily mean a loan or being their guarantor is a no-go area, but gives you the chance to address whether the defaults were the result of youthful mistakes that have since been rectified or the sign of more ingrained bad money habits.
He advises using the free credit report that credit ratings agencies are legally obliged to give you every 12 months as an opportunity to suggest that everyone in the family look at theirs together to address any problems that could affect a loan. The Australian Securities and Investments Authority’s Moneysmart site explains how to obtain a free credit ratings check and report here.
Sometimes the best option is to avoid becoming a guarantor on a mortgage or loan all together, while still helping your kids out as best you can. Doessel explains how his own parents-in-law helped him and his wife when they bought their first home.
“I didn’t have enough for the deposit so my wife’s parents refinanced their house and loaned us the money for the deposit,” he said. “That way if we were to go belly-up the only thing that her parents were to be viable for was the small loan that they took on their property, not that plus our house payment as well.”
While there are obvious things that will affect your credit rating, such as missing payments on utilities or mobile phone bills, or having multiple large sums outstanding on multiple credit cards, simply making too many requests for credit can damage your credit rating for up to five years.
For example, Doessel says that while it may seem smart to shop around for the best credit card interest rate by making applications for cards with a number of banks, too many applications will hurt your credit rating.
“Just making those enquiries alone will destroy your credit rating,” he warns. “People don’t know the impact because you can do it over the phone and they’re legally required to give you certain legal disclaimers but they don’t do it.”