In today’s ‘Make Credit Work For You’ post, we look at advice from the Editor of Smart Investor magazine, Nicole Pedersen-McKinnon. Her article “Financial freedom: are you self-sabotaging?” was featured in Sunday’s Sydney Morning Herald. Nicole gives you some excellent advice for how to make the best of your money, and make sure you are not making basic mistakes that could see you taking longer to reach your ultimate financial goal of being debt-free.

By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repair and www.fixmybadcredit.com.au.

Financial freedom: are you self-sabotaging?

IT’S likely the people around you know whether you’ll ever ”make it”; that is, make and keep enough money to secure the life you crave. They’ll know this simply by observing your behaviour. And they’ll know it quickly.

If you’re game, ask their opinion to see if they squirm.

The wrong attitude to your cash – leading you to do the wrong things with it – indicates a ticking financial time bomb. Here are the mistakes that will lead to an explosion:

■ Missing the (second) once-in-a-lifetime opportunity to repay your mortgage fast and save a fortune. Official interest rates have returned to the record lows set during the credit crack-up, and home-loan rates have plunged about 4 percentage points. Say they hypothetically stayed here and you hadn’t ever reduced your repayments, the extra $700 or so you would be contributing to a $300,000 mortgage would save you $118,000 and almost 11 years.

■ Keeping lazy savings. There is no excuse for holding money in low-interest savings accounts. You should be getting about 5 per cent (taxed) or, better still if you have a mortgage, an effective return of about 5.5 per cent (tax-free) by sticking it in there.

■ Not grabbing gifts such as government allowances, benefits and super giveaways. The big ones you need to apply for include first-home buyer concessions, family tax benefits, baby bonuses or paid parental leave, childcare assistance and the super co-contribution.

■ Falling into the yawning traps set by finance companies. The largest are making new spending on 0 per cent balance-transfer credit cards – this will be charged at an eye-watering interest rate. If you are ahead on mortgage repayments, then taking up a thoughtful offer to reduce your repayments is designed to recoup the lender’s lost interest. Also, if you breach the conditions to get the headline rate on savings accounts, you will lose out. You must hit the monthly requirements or the institution wins.

■ Staying out of the sharemarket, perhaps in favour of cash or bonds. Yes, the credit crack-up was confronting but you need growth assets such as shares and property to reach your goals. The key is to balance these with more stable, income-producing assets. The fortunes of markets can turn on the head of a pin – witness the 20 per cent share recovery in the past year – and you need to be invested to benefit. Remember this applies to your super, too.

■ Over-leveraging. Heed the main lesson of the global meltdown and use investment debt sensibly: limit it to an appropriate amount and have the means to cover it if a market turns hostile.

And the big one:

■ Year after year using credit to spend more than you earn. This short-sighted behaviour has the greatest potential to sabotage your future. To be a financial success you don’t need to be particularly clued up, but you can’t be clueless, either.

The last point might seem simple, but it can be tempting to bury your head in the sand about what your incoming finances actually are, and live your daily life on credit, spending more than you earn.

This thinking isn’t limited to those with a low income. In fact, Australian Bureau of Statistics reported late last year that spending more than you earn can occur across every level of income.

“One in seven Australian households is spending more than it earns, as the working poor struggle with monster mortgages and surging power bills.

Nearly 8 per cent of the nation’s richest households were living on credit, the Australian Bureau of Statistics reported yesterday.

Of the top 20 per cent of households earning the most money, 3 per cent could not afford to pay a gas, electricity or phone bill on time during 2009-10.

Of the poorest 20 per cent of households, one in five could not pay their bills on time and one in four spent more than they earned,” it was reported in news.com.au in the story News.com.au ‘Aussie strugglers living beyond means’.

And the end result can be the same. People can bomb out with their finances at every level. And Creditors don’t care what your income is when you’ve defaulted on your credit, only when and how you intend to pay.

If you have over-extended yourself – even if it hasn’t yet made it to default stage – act now to reduce that debt. Make a plan – find a good financial counsellor (call ASIC’ financial counselling hotline on 1800 007 007 for a reputable one) – and make some tough decisions about your life. By all means necessary, avoid that default or any other impairment to your credit file.

What Ms Pederson-McKinnon didn’t mention, is another way you could be sabotaging your own financial freedom – by living with defaults on your credit file that shouldn’t be there. A default on your credit file will give you 5 years of blacklisting from mainstream credit, meaning if you need credit during that time you will be paying thousands more (on an average home loan tens of thousands more) in interest over the term of the loan.

By having your credit file reviewed by a credit repairer to check your suitability, you may find you are one of those lucky ones that is able to have their credit default removed. This process happens legitimately and legally by people who are experts at auditing your Creditor for compliance issues which can deem your credit listing unlawful and therefore removed from your credit file.

Contact a Credit Repair Advisor if you need more information on credit repair 1300 667 218.

Good luck with your own path to financial freedom.

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