If you are worried about your rising debt, you are not alone.
According to Roy Morgan Research, over half a million Australians carry more than $5,000 in credit card balances and around two million Aussies don’t pay off their credit card debt in full each month.
Some debts make financial sense – for example, good debt like taking out a mortgage will help you buy a house. But bad debt can be financially crippling, especially if interest rates start rising. They can encourage you to spend more than you can afford on consumer goods, holidays and other lifestyle needs and borrow from your future.
The interest and fees you’re charged add to the high carrying cost of these liabilities. Bad debt can also prevent you from accomplishing your financial goals like owning your own home.
Here are some debt-busting tips to help get you in financial shape in 2015.
1. Get the facts
You can’t fix what you don’t understand. List the details of all your debts. Examine them by size, type, due date and so on. Also, reflect on why you incurred each – was it because of necessity, spontaneity or to fulfil an emotional need?
Get your free credit report by visiting CreditSmart and make sure you understand the credit and other information contained there. Institutions like banks, other credit providers, telecom and utility companies use credit reports to determine whether to extend credit to you. You can also find out your free credit score – a number that sums up all of the information contained in your credit report – by going to GetCreditScore.com.au
2. Speak out
If you’re facing hardship and the problem is dire, your best course of action is to immediately advise your credit providers and work out a plan with them. You’ll be surprised by how keen they are to help you find a workable solution rather than seeing loans go bad. They may defer payment or allow you to work out a repayment plan. Remember it’s in their interests to help you if they want to get their money back.
3. Stop incurring more debt
Stop using all but one of your credit cards. Lower the limit on this card and try to use it only for emergencies. What other cards and accounts can you cancel?
4. Live within your means
Understand your income and expenses, and then draw up a realistic budget to balance these. Examine what you can do without and what costs can be cut. Remember, every dollar saved counts and the more you have to throw at your debt, the less interest you will pay and the quicker you will get out of debt. Also, set aside some money for emergencies. An unexpected setback could turn your debt reduction plan upside down.
5. Cash in on assets
Do you have any assets you can sell or non-superannuation savings you can turn to? What “junk” could you sell on Gumtree or eBay? It’s likely that the return on any investment is going to be lower than the interest charges on your debt.
6. Create a strategy
While there is no “one size fits all” approach, making regular, fixed payments is the fastest and most cost-effective way to reduce debt. You can also save even more and pay off debts faster by making extra repayments where possible.
Examine the pros and cons of paying off different types of debt first – consider paying off the debt with the highest interest rate, the smallest balance or non-revolving debt first. Consider increasing the frequency of your payments – rather than making monthly payments, pay weekly or fortnightly.
In addition, consider consolidating your debts. Debt consolidation involves rolling your different debts into one loan, such as your credit card or a personal loan, at a lower interest rate. This rate is usually fixed, making budgeting easier and your monthly expenses more predictable.
When it comes to getting the best rate for your consolidated debt, consider bypassing the banks altogether and going for peer-to-peer lending. SocietyOne is Australia’s leading peer-to-peer lender where investors fund your loan at rates that are sometimes up to 4% better than the average rates of the big banks.
Visit their website for more information on peer-to-peer lending and how it helps with debt consolidation.
Be warned, though. While debt consolidation helps you restructure your debt, it does not eliminate it. It will not be effective if you start running up your credit cards again. You also need to do your homework to ensure you are in fact getting a better deal.
Questions to ask before consolidating your debt include:
- Even though the interest or monthly repayment rate is lower than on my previous loans, could I end up paying more because the length of the loan is longer?
- Are there any hidden fees or monthly charges?
- What are the establishment fees and are there any early repayment fees?
- Is the loan secured or unsecured?
- If my loan is secured – that is, tied to my home or car – am I prepared to lose this asset if I default?
- Who is best to consolidate my debts with – my bank, specialised lenders, or a peer-to-peer lender?
- Is this lender licenced with a good reputation?
- Have I shopped around enough?
- Have I checked all the fine print?
7. Get help
If you still need help, visit www.financialcounsellingaustralia.org.au to find a financial counsellor or call the National Financial Counselling Hotline on 1800 007 007.