Impact of your personal financial circumstances-borrow and service personal debt.

 Assignment 1A– Your Credit @ Risk!

 [15 MARKS OUT OF 100 MARKS TOTAL]

 Task: The task set in this exercise requires you to carefully weigh up the impact of your personal financial circumstances (as reflected in your budget—income and expenditures) on your ability to borrow and service personal debt.

Learning Outcome: Building a sound credit history requires foresight, effort and discipline. In this assignment you will learn how to take the right actions for building a sound credit history. You will do so through considering your own personal financial circumstances and goals, exercising control over your spending (i.e. managing your consumption/gratification) and matching your borrowing amount (and thus repayment rate) to your personal financial circumstances. There are three financial skills you will develop: planning, decision-making and problem solving. 

Background: The case for addressing personal financial capability rests on managing risk in a way that promotes financial health and builds wealth. A study by Consumer Financial Protection Bureau reports that one in 12 people are without credit records or have records that are considered so poor that they are “unscorable”. Since a credit history is something that you develop over the course of your lifetime, the problem of limited credit history is concentrated among the millennials, with over 80 percent credit invisible or unscorable. The report from credit rating agency Experian concurs: 58% of millennials (born 1981-1996) with a credit record have credit scores well below what is generally regarded “good”, compared to 53% for Gen Xers (born from the early 1960s to late 1970s) and 27% for baby boomers (born in the years following WWII). In a survey by fintech firm OppLoans, one-quarter of millennials never learned how to build a sound credit history, with 15% having unmanageable debt levels, and one in five admitting to having absolutely no control over their personal finances. The scope and scale of the challenge to address these problems can hardly be exaggerated.

There are two major components to building a sound credit history necessary to be financially secure and have reliable access to multiple lines of affordable credit:

• First, there must be a concrete basis to demonstrate your capacity to pay in the future. This entails an assessment of your own current financial situation and debt repayment plans.
• The second component lies in your credit history, focusing on your past record of (non-)payments. Expensive credit can adversely affect your personal financial health and thus your credit score. Loans taken out unable to be repaid in time due to unexpected changes in your personal circumstances will have an adverse effect on your credit score.

Required: You are planning to go on a well-deserved two-week holiday to tropical Fiji in the winter break in July. Unfortunately, you have no savings to draw upon and are left to finance your proposed holiday entirely through debt to be obtained from a major financial institution. To evaluate your capacity to borrow and establish/maintain a sound credit history, you are to perform the following tasks using the Excel spreadsheet provided to you.

QUESTION 1 (PLANNING). On the Excel spreadsheet, prepare a financially responsible (this usually means the budget is expected to be in surplus and the likelihood of a budget deficit is not too high, e.g. above 30%) personal budget with acceptable risks where you provide your best estimate and expected range (high and low) of your weekly income and expenditures for the next 24 months (do not include the cost of the proposed loan). While you will benefit most from this assignment using your own personal financial data, if you prefer, you may create a fictional budget. We have provided on Canvas some data based on the average income and expenses for university students to assist you with this. Explain clearly why you believe your budget is financially responsible.   Identify the two major (income or expenditure) items that pose the biggest risk in terms of balancing your budget. Explain why you chose them. (6 MARKS Maximum 150 words – 10% tolerance).

 QUESTION 2 (DECISION-MAKING). On the Excel spreadsheet, decide on the optimal loan amount (keeping in mind the need to take out a loan as well as the need to establish a sound credit history). Fully justify your decision and in particular (but not limited too) explain the role the repayment period and the likelihood of a net budget deficit after taking out the loan played in your decision about the loan amount. If you do not have a credit history or score, use 340 as your current credit score. (6 MARKS Maximum 150 words – 10% tolerance). 

Hint: If your current budget does not allow you to borrow sufficient funds to service your loan (your loan gets rejected) or build a sound credit history (your credit rating is expected to worsen), you will need to deliberate on your income and/or spending habits. To get the loan approved and improve your credit ratings may be as simple as changing the repayment period, increasing your income, or taking more control over your spending (lower the ranges). You may need to plan for a cheaper holiday.  

QUESTION 3 (PROBLEM SOLVING). Following a sustained period of historically low inflation, the recent upsurge in price pressures has vividly highlighted the impact inflation can wreak on people’s finances. This makes it difficult for people to plan how much they can spend, save, or invest.

Since you have taken out your loan, there has been a sharp rise in the cost of living due to the high inflation in Australia and around the globe, and it is projected to rise further to the point that your budget is expected to be in deficit. What specific action plan is necessary to ensure you can avoid default and not damage your credit rating?  (3 MARKS Maximum 75 words -10% tolerance).

Your budget and well-supported answers to the above questions must be uploaded as a Microsoft Excel Spreadsheet (StudentName_Number_Assignment1A.xlx) on Canvas by the due date. Please ensure you check the Rubric sheet for assignment 1A to ensure you satisfy the marking criteria.