When you might pay off your HECS/HELP debt early
The amazing thing about personal finance is that it is exactly that — personal. There is never a one-size-fits-all approach, although that would make it easier to write this book or host a personal finance podcast.
In my somewhat ‘professional’ opinion from my past life as a financial adviser, I believe you could consider paying off your HECS/HELP debt early with voluntary payments under the following circumstances.
You have a small amount of HECS/HELP debt left relative to your overall situation, and the repayments are affecting your borrowing capacity for a mortgage.Banks and lenders don't assess the ‘amount of debt’ left to be paid. Rather, they assess the amount of your income that is compulsorily withheld by your employer and given to the ATO to service the debt based on your income. For example, if you had $5000 of HECS/HELP debt remaining, paying the HECS/HELP debt down could free up that extra bit of servicing income (once you report to your employer that you no longer have any HECS/HELP debt so that they stop withholding that extra repayment amount). A quality mortgage broker would help you assess the impact on your borrowing capacity and whether early payment of a HECS/HELP debt is beneficial in your circumstances.
You have an employment relationship that allows pre-tax salary sacrifice of HECS/HELP voluntary repayments. This effectively means you can pay this debt down with ‘pre-tax’ dollars. The wash up of this is akin to being able to claim post-tax voluntary repayments on your tax return. But I would consider ensuring that your other short- and medium-term financial goals are taken care of before doing this.
You have met all your other short- and medium-term financial and lifestyle goals and you just want to swing back around and clear the debt for ‘housekeeping’ sake and to free up withheld amounts being taken from your pay.But remember: the payments are not tax-deductible and additional payments would be ‘wasted’ (see explanation above) if you die prematurely.
For the last two points, I certainly would not be considering paying HECS/HELP debt back voluntarily if you have other consumer debt. Run your debt snowball first.
The truth about credit scores in Australia
‘Will paying off my debt affect my credit score?’
‘My credit score is important!’
‘How do I increase my credit score?’
‘I need to get a loan to get a credit score!’
These are common statements that I have heard or that may have slipped out of your own mouth. Australia is heavily influenced by the USA in its culture, and their society and financial system is built on the back of the credit score system. In the USA, you need a credit check for house rentals, car insurance, home insurance, health insurance and even some online dating profiles! It's everywhere! And the concern about credit scores has crept into Australia. Let's break this down.
Here's why you shouldn't worry too much about credit scores.
There is no national credit score system in Australia that is magically linked to your tax file number (or anything like that). There are three main credit record agencies (or credit bureaus) in Australia: Equifax, Illion and Experian. Each bureau may have a record of you and their own profile from which they assess and produce a score for you. Generally, your record with these bureaus has your current or most recent home address (as well as previous addresses), date of birth, full name, and so on.
Credit providers such as banks, electricity companies, phone companies, other utility providers (or anywhere that you borrow money or are on a use-now-pay-later account, such as an internet plan) may choose one, two or all bureaus to work with. For example, if you didn't pay your phone bill on time, it's possible only Illion got a notification, placing a negative mark on your ‘credit’ file.
When applying for a loan or mortgage (remember that you won't be applying for any consumer debt going forward!) the credit provider may sweep one or all of the bureaus to gather data about your history of repaying money. At this point they will make their own judgement and assess how creditworthy you are.
Let me repeat that: banks and lenders don't have access to a central credit score government-owned database … these bureaus are non-government (i.e. private companies).
So what does this mean? It means that the proposed credit provider (e.g. for a phone plan or home loan) will gather credit information from one or all of these companies and build their own credit profile on you. This means there is no huge issue with your specific ‘credit score’. I live and breathe personal finance daily for a living and I honestly don't know what my ‘made-up score’ is with any of the bureaus. I don't let this myth run my life.
Bottom line: the best thing to do regarding your personal credit history is to pay your bills on time and have cash in the bank!
BNPL: Afterpay, Zip Pay, etc.
Make no mistake: if you possess or use a product or service before you have paid for it, you have a debt. No matter how cute the marketing is, no matter how good the app is, no matter how nice the technicalities of the product are.
At the time of print, the buy-now-pay-later (BNPL) industry isn't regulated. What does that mean? It means the Afterpays and Zip Pays of the world are not governed under any consumer credit laws in Australia. This is because technically there is ‘no cost’ to the consumer to use this service, nor is there unlimited interest charged to the consumer (as there is for credit cards) if the consumer does not pay back the money.
After you read this book and implement a spending plan, build your financial foundations, and develop a great mindset, my hope is that you will look at BNPLs like I do. I look at them as a distraction, a joke, a modern-day ‘payday lender’ (google that one) — a company that is mainly profiting by making it attractive and easy for you to make purchases which can be paid over ‘four easy instalments’.
If it sounds like I am being critical towards these companies, it's because I am. I like how we live in a country that does allow freedom to innovate and I am excited to see what the future of money looks like and all that. However, these BNPLs are used for consumer spending so they use language that is inviting and fun: ‘four easy instalments — sign me up, baby!’ Note the sarcasm. Without regulation and with more competition from new players, these instalments will go out to 52 easy instalments, 100 easy instalments, and so on. Don't get me wrong, I understand that up to 75 per cent of these companies’ profits come from the fees they charge the retail stores to use them. If you want to support your local small business, don't use BNPL in their stores because they make less money when you use BNPL payment methods.
Let me get to it. Here are the reasons you should not use these services.
By using BNPL you are not learning how to manage your money. You should not outsource your diet to a shake, nor should you outsource your budgeting to a ‘credit provider’. Afterpay says the average purchase is $150. They are not clear on whether or not this is an individual item or a cart full of items online with the one retailer. If you honestly need to spread out $150 over four $37.50 instalments, I am sorry to say that you have bigger problems in your budget. Particularly if you are working full time. This will offend people as I have had people tell me that Afterpay has helped low-income people and people in a pinch. My comments are that the worst time to get into debt is when you are in a pinch.
Having payments in your life — even if they are interest free — ties up your cashflow budget and if your circumstances change a week after the purchase, you might not have the money