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Confused at this outcome!
CC V Personal Loan

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16 replies to this topic

#1 tweedy08

Posted 07 December 2012 - 09:56 AM

So my daughter has just finished school and has been working part time for the last 4 years. She needed some repairs done on her car and was contemplating getting a loan and buying a new car.

Anyhow, after a lot of contemplation I agreed with her that she should get her current car repaired since the repairs are around $2k to get fixed (probably less if she shops around). I just didnt want her having the large repayment responsibility of a car loan just yet and we are not in a financial position to lend her the money unfortunately.

So we went into her bank and they suggested definitely a personal loan. The minimum amount on that was $4k, That was fine since she could just pay $2k straight back onto the loan and get her repairs done. So we do the application and it comes back declined due to her income. She gets at least $350 in the hand a week and has no expenses. The lady says that she cant understand why it was declined since the repayments would be $109 per month. So she said to apply for a credit card and then get the repairs done and cut up the card. I hesitantly agreed and that was only because I thought that well she wasnt approved for the loan so this wont go through either.

Well imagine my horror when the application came back accepted.....for $4200!!!

Why would the bank decline for the loan but approve the credit card. How do banks work? I have told DD that I will hold her card and that she can get her car fixed then we are cutting it up! We are going to work the repairs into the affordable payments so that she will have it paid in the 55 days interest free time.

Any other suggestions I can offer her. She is 18 and I dont want her falling into the trap of bad debt so young! I am still trying to talk her out of even accepting the card and just going into a joint loan with her dad. I know CC arent all that evil, but as a parent I just want her to be responsible.

Thank you for advice in advance.

#2 julzely

Posted 07 December 2012 - 10:33 AM

I can’t help on how banks make decisions and given your predicament the credit card doesn't sound like a bad idea.  However I would make a spreadsheet showing how much in interest she will have to pay depending on how long it takes her to pay back the $2000.  I think this will give her a good idea of the “real” cost of borrowing money.  Also please be aware that is it UP TO 55 days interest free, so you would need to know your billing cycle before relying on this. You should also be able to contact the bank and request a lower limit on the credit card. Unless she has already proved to be very irresponsible with money I wouldn't necessarily just cut up the card or have you hold onto it as I think at 18 it is her choice if she wants to use it. However I would arm her with all the information, to help her make an informed choice.

Another idea is to put the repairs on the credit card, then apply for a credit transfer to a different card which often gives you anywhere from 3 months to 12 months interest free.  Then cancel the old card.  I haven’t actually done this so you should probably do some research around whether or not it is a valid option in your situation.

#3 tweedy08

Posted 07 December 2012 - 10:51 AM

She is very responsible with money or as responsible as an 18 year old can be of course.....lol.

I have spoken with her and we both agree that perhaps the amount is a little too high for her atm (temptation wise) and when she goes in to the bank to collect the card she is going to ask them to lower the limit.

Both hubby and I have armed her with all the information we possibly can including the troubles we had when we were young and given money. We have ensured she knows that this is NOT free money and that she does need to pay it back. She is happy for the card to be left at home in order to avoid those big ticket impulse buys that we often regret when we get home....lol.

I am still shocked at this outcome though. I really thought a personal loan would be the more affordable option over the CC but who knows. Maybe I am thinking about this all wrong?

#4 M1B2G

Posted 07 December 2012 - 11:20 AM

The loan is more sensible for you guys...  However the credit card has a greater capacity to earn profits for the bank...  

Banks do not make money off people who pay their credit card debt quickly they make it off people who are stuck in a cycle of paying off a payment against their credit card debt..

My pensioner parents continue to get offered completely inappropriate credit card limits that they cannot afford on their small fixed income.

#5 Beanbag Warrior

Posted 07 December 2012 - 11:28 AM

A credit card has a MUCH smaller minimum repayment on it than a loan does.  My $6k visa only needs about $35 put on it to retain the card.  Then, they can earn the interest they'll be charging you, so of course they'll give her the credit card over the loan.

By cash in hand, do you literalyl mean notes to palm, or just what goes into her bank.  If you literally mean CIH, then I'm not surprised - it's hard to prove savings without a DD from payroll into her account.

#6 tweedy08

Posted 07 December 2012 - 11:31 AM

QUOTE (NapCat @ 07/12/2012, 12:28 PM) <{POST_SNAPBACK}>
By cash in hand, do you literalyl mean notes to palm, or just what goes into her bank.  If you literally mean CIH, then I'm not surprised - it's hard to prove savings without a DD from payroll into her account.

I mean after tax and what is put into her bank account original.gif

#7 Mrs Mc

Posted 07 December 2012 - 02:20 PM

Does she have any accounts in her name, like a phone account.  I know when i was younger, i got declined for a mobile phone.  They told me go get a credit card, but small items on it and repay it straight away, that will give her a credit rating.  At the moment she would not have a credit rating at all.

#8 ellebelle

Posted 07 December 2012 - 02:31 PM

I would be asking to speak to someone more senior in the bank. I think that's appalling.

#9 tweedy08

Posted 07 December 2012 - 02:47 PM

QUOTE (Mrs Mc @ 07/12/2012, 03:20 PM) <{POST_SNAPBACK}>
Does she have any accounts in her name, like a phone account.  I know when i was younger, i got declined for a mobile phone.  They told me go get a credit card, but small items on it and repay it straight away, that will give her a credit rating.  At the moment she would not have a credit rating at all.

Nothing. Her Mobile phone is prepaid and all utility bills are in mine and her dads name. She actually giggled and said that she doesnt even have a mobile phone plan yet she has her own CC!

QUOTE (ellebelle @ 07/12/2012, 03:31 PM) <{POST_SNAPBACK}>
I would be asking to speak to someone more senior in the bank. I think that's appalling.

I am thinking of doing that when she goes in to pick up her card. I do think though it has to do with the fact the the repayments on a credit card are a lot less harsh than a personal loan just as NapCat has said.

Maybe im being an overprotective parent and should let her have this responsibility. We are definitely getting the amount lowered though when she gets the card. At least she is less likely to get in trouble with a $2k card over a $4k card.

I am still shocked though about this whole scenario. Well on the bright side, she will have her car fixed  up and I wont have to worry about her being out and her car not starting.

Its crazy how banks work these days as I was chatting with DD BF just this morning and he has just been approved for a $20k car loan but couldnt get any more than $1k for a CC yet he has been working FT for 2 years on well over $900pw.

Very weird!! But I will ensure my daughter is armed with all the right info in order to avoid trouble. Between us though, I would jump in and make the monthly repayment if she got in trouble. Would hate for her to stuff up her credit rating so young. I wont be telling her that though and she already said that she applied for an extra card for me and will be leaving her card with her dad once the repairs are done. The card is linked to her bank account so she can easily transfer money directly over to the card in order to make repayments.

#10 opethmum

Posted 07 December 2012 - 03:04 PM

I don't think cutting up the card would be a good idea in the long run, I think it would be a good thing for her to have in case this happens again and that she can get those big ticket items when she feels she is able to bare the cost.
When she does apply for a home loan or personal loan I think her paying off the credit card says to the bank that she can repay loans on time. Make sure she keeps on top of the repayments, set up internet banking direct debits from her account to her cc so she does not forget to repay the loan and each month sit with her to review her statements and budget accordingly for the next month etc.
Also if she is so tempted perhaps put the cc in a cup of water and freeze it.
Good luck!

#11 anasam

Posted 07 December 2012 - 04:46 PM

Have you tried a different bank? Not all banks use the same criteria for deciding on loans.

#12 FeralLIfeHacker

Posted 07 December 2012 - 04:53 PM

QUOTE (Mumof1B2G @ 07/12/2012, 12:20 PM) <{POST_SNAPBACK}>
The loan is more sensible for you guys...  However the credit card has a greater capacity to earn profits for the bank...  

Banks do not make money off people who pay their credit card debt quickly they make it off people who are stuck in a cycle of paying off a payment against their credit card debt..

My pensioner parents continue to get offered completely inappropriate credit card limits that they cannot afford on their small fixed income.


We applied and were approved for a balance transfer on a cc, the amount was $2000,  the new CC came with $5k credit limit, I mentioned this to a friend in banking and she said it was common practice since the bank hopes you spend the extra $3k.

#13 *JAC*

Posted 07 December 2012 - 06:44 PM

Just to comment on PP's saying you need a credit card or similar to 'get' a credit rating. This is not true. All that appears in a credit check are defaults and things you've applied for. in facet if you list a credit card when applying for something, it is more of a liability than a positive. Even if you have zero balance they look at the limit as a debt.

#14 jojo24

Posted 09 December 2012 - 08:37 PM

tell her to shop around we recently needed $2k worth of stuff done to the car and they offered 2 payment options 1 was interest free pay off over 12months, the other was pay some up front and pay off over 6 months.

#15 KT1978

Posted 09 December 2012 - 08:44 PM

Does she have a savings plan? Maybe a good time to start her off saving at least $100 week after te repairs are paid off? That way the next big expense will be taken care of.

#16 Let_it_Rain

Posted 09 December 2012 - 08:54 PM

I'd say it came down to affordability. The bank has to assume some expenses even if she does not have them which whill effect it if she has a lowish income.

A personal loan will have fixed repayments since there is an end date, credit card she can pay $50 a month forever so much more affordable.

I worked for a bank until recently and for us a personal loan was a "better" sale than a credit card.

Lying about the outcome of an application would also be a sackable offense so I somewhat doubt they would be saying she was declined to get a different sale.

#17 ~ppp~

Posted 09 December 2012 - 08:56 PM

If your daughter takes the credit card and responsibly pays it back I would think this would help to establish a good credit rating for life for her which will come in handy in the future for home loans etc.

But I know personally I saved heaps of money and always had about $8k saved from 18-22years of age ( working 12 hours a week), then got a credit card and was then always in debt as i just bought what i wanted rather than saving for something I wanted.

My one friend who is excellent with money and paid her mortgage off in <5 years has never allowed herself a credit card. So I do think credit card require a heap of discipline and cutting the card up might be the best approach :-)

Eta: just read above and sounds like it doesn't help the credit rating. Personally is try and keep her away from credit cards then

Edited by knowsnotmuch, 09 December 2012 - 11:55 PM.

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