Last week, I had to do something thoroughly unusual: walk into a bank branch and talk to a human. With all my banking generally handled by computers and machines, the experience was odd from the outset and then made even more so by an unsolicited offer from the teller:
“I’d like to let you know you’ve been pre-approved for a $6000 credit card.”
It wasn’t pushed, there was no sales pitch. Like many an unsolicited offer, it was just awkwardly flopped out. When I didn’t react, he let it go and that was that.
With the Royal Commission into banking misconduct unfolding around me, this little incident got me wondering just how much credit-pushing comes from the banks and whether young people are equipped to navigate it. What follows is everything I uncovered. You’ll meet people who’ve struggled with credit cards and bank-speak, and an expert ready to unravel the terminology and unpick the truth from the marketing jargon.
Pre-approval: it’s not what you think it is
I checked back with my bank to see what the deal was. Turns out they hadn’t even confirmed whether I met any minimum requirements. The “pre-approval” was an invitation to let them check.
“So no kind of approval whatsoever has been done? It’s just an invitation?”
“Why don’t you just call it an invitation then?”
My question was met with an awkward laugh.
I raised this with our expert: Shane Black. For an exploration of banking misconduct and credit card debt, you couldn’t ask for a more appropriate expert than Shane. He’s worked in both law-enforcement and finance, and has a bachelor of policing, advanced diploma in financial planning, master of applied finance, master of business administration and master of financial planning (the man likes to learn). He’s done tours in three of the big four banks as a financial planner and now works independently, specialising in wealth generation for young people.
Shane said this pre-approval bewilderment is a common theme with his clients.
“They’re confused because they’ve completed a pre-filled application sent to them by the bank, submitted it and then they’re told they don’t qualify which puts an enquiry on their credit score.”
How important is a credit score?
A single enquiry isn’t going to hurt your score but, if too many add up, it can be detrimental. And, according to Shane, the idea that you need a credit card or loan to build your credit score is a myth. If you pay your bills on time and stick to contractual agreements, this alone will build your score.
“Don’t think you need to follow social norms of getting a credit card or home loan. Take your time, get informed. In my profession, I see a lot of people who made rushed decisions when they were young and then they get into their 30s and they’re held back from where they could be by this weight of debt.”
Do you even need a credit card?
Many credit card limits exceed not just your monthly disposable income, but your entire income. Here, I’d like to introduce you to Jules who got a credit card without even meaning to:
“I purchased something on a 30 month interest-free deal. Turns out the process applies for a credit card and the bank automatically gave me $5000 when my purchase was under half that amount… There’s no way I would’ve gotten a credit card by choice, but here I am now owing a credit card. Not cool.”
According to Shane, these high limits are a trap in your pocket. All it takes is a few idle purchases for you to set them off. And, with the way interest compounds monthly, you’re looking at a steadily rising tide of consequences that can flow on for decades.
When is it a “yes” to credit?
Cards with low credit limits can be useful. The idea is to have a balance that can easily be zeroed, every single month. You can run expenses through it and benefit from the interest-free period and any reward program attached to the card.
If you go for one of these cards, your provider is obligated to let you opt out of credit limit increases. This can be done online or over the phone and saves you having to deal with tempting credit card marketing.
There are also ways to use debt to grow wealth but these are not for beginners. And even the seasoned pros need to know where to draw the line. Having graduated and settled into a secure job she loves, Curley has started using debt to her advantage:
“I currently have a mortgage, a credit card, a bike loan and a HECS debt of over 100,000. My finances are great and I save quite a bit of coin each month. A few weeks ago I paid off my credit card in one lump sum, a total of almost $7000. As soon as I paid off the card, I received a letter from the bank offering me a $35,000 personal loan. I burnt the letter.”
Shane approves of this strategy, suggesting people stay away from personal loans and overdrafts.
Credit card tips: how to protect yourself (from yourself)
Since its inception, marketing has been designed to tap into emotional triggers.
Successful advertising sneaks around your rational mind to get to the reactive, emotional centre that is more likely to make impulsive decisions. Whether it’s a credit limit increase, car loan, or other big purchase, Shane stresses these financial decisions are not ones to be made quickly.
Travis, who has a submission in the Royal Commission, is still battling to escape the debt he got into after being mislead by a loan insurance product:
“I lost my job and the loan insurance I’d been paying for seven years was automatically closed. I couldn’t take out a claim to use my insurance policy to repay the measly amount left on my loan (about $800 out of $15,000). This was in 2014. I’m still fighting them. They’re now charging me 18% interest on a bill I’m never going to pay that should’ve been taken care of by my loan insurance policy.”
Travis’s story exemplifies how easy it is for debt to mount up, especially when life and job opportunities don’t pan out as expected. With credit cards offering 18 months interest-free and limits of up to $10,000, it can be easy to think, by the time the interest-free period is up, you’ll be in a position to pay off the balance.
Shane warns against this kind of thinking. In fact, he says if you’re feeling any kind of heightened emotion, you shouldn’t be making financial decisions.
“If you get something (marketing from the bank for example) and it’s bright and shiny and looks good, just pop it away for 72 hours, and then come back to it. So your brain’s had time to process the emotion, get past the excitement and is ready to look at it from a rational perspective.”
Where can you find trustworthy professional financial advice?
Craig Meller, CEO of wealth management giant, AMP, has resigned in the wake of damning revelations from the Royal Commission. As the findings unravel, and more corruption emerges, the prospect of trying to educate yourself on financial matters seems more and more daunting. While the internet is a wealth of information, search engines do little to discern between cleverly disguised marketing material, misinformation, and genuine content. Shane concedes the struggle is real:
“Don’t go to anyone who’s in the business of providing credit cards and loans to ask for advice on credit cards and loans. Find someone who doesn’t have those direct influences and seek information from a different sources so you have a basis for comparison. You’ll start to see if people have an agenda.”
And be wary of free advice. Usually, if advice is free to the consumer, the provider is getting paid from somewhere else. Both online and in person, that could be commissions through referral programs as we’ve found with the Royal Commission.
Some reputable, free resources to get you started:
For a quick and easy budget tool: ASIC Moneysmart budget planner
If you’re a uni student, trustable, free financial assistance can be gained from your university (Deakin students, click here).
Stay tuned for part two where we chat to Deakin Student Services about the resources, opportunities and financial assistance available to students.