|
What to do when you have bitten off more debt than you can chew
by Greg Smith
Getting yourself into debt is quite an easy thing to do now days. Using the old credit card to pay for the groceries, power bills, new clothes etc, has become second nature for many of us as we carry less and less cash around.
In fact, according to recent stats from the Reserve Bank we use these plastic cards so much that as a nation we have racked up close to $25 billion dollars in credit debt. Of course many people are savvy enough to pay off their cards in full each month and use the banks money interest free, however there are many others who simply pay the minimum balance and fork out up to 18% pa on their credit card purchases - which is just not good money sense.
Add to this how easy it is to get a personal loan and the relative ease of getting one of those 'buy now pay later deals' and we are starting to talk many billions of dollars owed on personal debt. In fact the Reserve Bank of Australia has estimated the total amount of personal debt to be somewhere in the range of $82 billion. That's an average of just over $4,100 for every man woman and child.
We live in a 'buy now pay later' society which tempts us to keep on spending, however as enticing as this may appear we must never lose sight of the fact that we are using someone else's money and that there is always an extra cost to that. Having such easy access to credit can unfortunately lead to problems especially if it goes unchecked.
Therefore the best way to manage your debt is to get it under control before it takes control of you.
So here's three ways to break out of the debt trap :
1. Get your credit cards under control - if you have more than one credit card cut up them up and leave just one. Then focus on paying off the cards with the highest interest rate first. Work out what the minimum monthly payments are and then add 5 or 10% to this amount. Now comes the hard part. Make a promise with yourself to make these extra payments until the debts are completely paid off. Yes it may mean giving up smoking or going with out something but you simply have to become disciplined. One way to look at it is that if you feel the urge to buy that extra takeaway meal during the week consider the fact that you could be making payments on that dinner for years to come. Now, even if you see that your minimum payments are going down, still keep making the same payment. Once you have completed this for one card get onto the next one, or focus on your personal loans.
If you have a number of credit cards it may be worthwhile to consolidate them into one lower charging credit card. For a comparison of what's on offer with credit card interst rates visit www.bankchoice.com.au.
2. Consolidate your debts - If you have a few personal loans and a few credit cards and do not have a home loan it maybe worth your while to have a chat with your bank or Credit Union (they usually have the cheapest personal loan rates) about rolling all your debt into a personal loan. The interest rate will be lower than your credit cards and you will have only one debt to concentrate on rather than trying to juggle multiple payments. Once again you will have to apply for the loan and be approved. To find your nearest credit union visit www.cuscal.com.au. If you've got a home loan and have sufficient equity in your home (ie you only owe, say under 80% of the total value of your home) you could consider rolling all of your credit card and personal debts into your home loan. Once again this puts all your debt into one place but there are two things you need to be careful of.
First, be aware that your short term debts like your credit card and personal loans are now being paid back over a much longer time period and secondly your prospects of reconsolidating may be eroded if your new loan gets close to the value that the banks may lend up to. In other words if your revised home loan (including all your credit card and personal loan debt) starts to get close to your loan valuation ratio (ie the percentage of the value of your property the bank will lend up to, eg 80 % - otherwise you'll have to pay mortgage insurance which will cost you extra) you may not be able to borrow any more on the equity you have in your home.
If you need some help here call your financial institution or have a chat to an independent mortgage expert at Mortgage Access on 1800 892 893. A word of warning with consolidating your debts is to steer clear of companies offering you debt consolidation services. Many of these companies charge you thousands for this so try and steer clear. Talk to the independent experts.
|
