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Get the most out of your Revolving Credit

Revolving Credit Facilities are becoming more and more popular but we're constantly seeing them not being used to their full potential or being set up wrong and costing people more money than they should.
Following on from our recent blog about the benefits of compounding interest we'll give you some tips below on how you can use a Revolving Credit to manage your money better and get debt free faster.

But first, what is a Revolving Credit?

This account goes by many different names depending on your lender (Orbit, Choices everyday, Flexi, Go Home Loan) but the simplest way of explaining it is to see it as part of your home loan, that operates like an overdraft. It means you have an account that you can draw a certain amount of money out of, pay it back any time you like and move money around as you please just like with a normal bank account but you are charged interest on the amount you are in overdraft. The good news is that the cost isn't as high as a traditional overdraft with banks generally using their home loan floating rate as the interest rate.

How does it fit with your home loan?


As an example you may have a $250K home loan. Let's say you fixed $200K for 2 years. You could then take the $50K remaining and put this in to a Revolving Credit (RC)
The RC would be a separate account that you could transact through just like your normal day to day account. You would start with $50K owing on this account and would be paying interest on this loan at the floating rate. If you then transferred $10K in to this account you would have those funds available to draw back out of the account at any stage and you would only be paying interest on the $40K remaining balance.

This is where the main advantage is.. the ability to reduce your interest cost and make lump sum payments on your loan at any time without penalty, whilst having the flexibility to draw the money out again in the event it is required for something else.

It's important to know that the right balance for the amount in a Revolving Credit is different for everyone. It depends on your income, loan amount, risk sensitivity, goals for repayment etc and that's why a "one size fits all" approach just doesn't work.

I've heard I should put all expenses on a Credit Card?

Not necessarily. There is a mathematical advantage in doing your monthly spending on Credit Card (interest free for up to 6 weeks) and letting your salary reduce the limit of your RC (and therefore interest cost) over the month, then paying your credit card off in one lump sum.

However, my experience has shown that this system only works well for a very small percentage of people. The main problem being that you do not have a clear picture of how your spending is tracking over the month and whether you are getting ahead on your goals. Most people find that when they come to pay off the credit card each month they have not made the progress on their Revolving Credit that they had hoped.

Even if you don't put expenses on the Credit Card and simply have a Revolving Credit attached to your main current account your are still open to the above issues of not being able to manage your money as simply as you could.

How do I get the most out of my Revolving Credit then?

The answer to that is simple. Make sure your overall loan structure is tailored to fit you, your income, expenses and financial goals. A small amount of time spent at the start, or upon reviewing now, can make things a lot easier for you and save you a lot of money.

I've included a flyer below which shows our principals on creating the right budget and account structure to work in with your home loan. This is not a solution in itself for everyone but we can help work through your personal situation to find the right structure that fits you.

For most people we recommend the following...

  1. A small amount in Revolving Credit and having this in an account separate to their main transaction account.
  2. Setting the right amount for the Revolving Credit based on your overall financial goals
  3. Setting a household budget so you know how much extra you may have to pay in to the Revolving Credit
  4. Consider bonuses or any other windfalls you may have so that they can be paid in to this account without penalty

The gains to be made by making extra payments and the interest saved on reducing your home loan can see you debt free a lot faster. Revolving Credit is a powerful tool but it needs to be used correctly to get the most out of it.

We can offer advice on tailoring the right loan structure to fit your personal situation and are happy to take the time get to know what will work best for you. Of course we can arrange for a restructure if required, to make it as easy as possible for you.

Feel free to email me directly using this link or if you'd like to send through your information for an independent review of your home loan simply click this link and complete the form there. We'll be back to you with an initial review in 48 hours.

As always, we're here to help

Adam and the My Mortgage Team
Mortgage Advisers
Waikato