How to manage your debt

Australia has the second highest household debt in the world , second only to Switzerland, with household debt running at about 125 per cent of gross domestic product (also known as GDP) . With stats like this, it’s no wonder debt is something that keeps us up at night.

According to the ABC’s 2019 survey, Australia Talks, debt is a problem for 90 per cent of the 55,000 people who responded to the research. Additionally, 37 per cent of respondents said they struggled to pay their debts, with almost half of millennials surveyed stating that debt is a problem for them.

But it’s not all doom and gloom for those who are concerned. Here are three ways to manage debt.

1. Debt consolidation

This is a strategy that can help you reduce the interest you pay over time and the total amount you pay on your loans. It involves consolidating or combining higher-paying debts such as credit cards into a lower-paying facility such as a personal loan.

Consolidating your debts this way could give you savings over time, given Canstar research conducted in April 2020 shows the average interest rate a non-rewards credit card charges is 13.76 per cent, while the highest rate is 24.98 per cent. This compares with an average rate of 10.30 per cent for personal loans.

Another option for managing debt is if you have a home loan, you may be able to consolidate all your personal loans and credit cards into your home loan. According to Finder’s figures from April 2020, the average variable home loan interest rate is 4.63 per cent. So, consolidating all your loans into your home loan means you’ll save even more than consolidating your debts into your personal loan. If you consolidate your loans into your home loan, you are putting up your home as security. This means that if you are unable to make repayments, the lender can sell your home to get back the money you borrowed. You should consider which option is the right one for you.

Debt consolidation has other advantages. Moving your credit card balances to a lower-interest rate personal loan or to your home loan can also stop you from spending more on your credit card to help you get a firmer financial footing.

2. Take control of your credit cards

Research into credit card lending by the Australian Securities and Investments Commission (ASIC), which reviewed 21.4 million credit card accounts, shows 18.5 per cent of us struggle with credit card debt. If you’re part of this statistic however, there are plenty of actions you can take to manage debt like this.

Take control

The first step is to take control by working out how long it will take you to pay off your credit card.

Let’s say you have a $10,000 debt on which you are paying 18 per cent interest. It will take you 43 years and 11 months to pay off this debt by paying the minimum amount of $203 a month, and you will end up paying $36,332 in total. But, if you increase your monthly repayments to $492, you can have the debt paid off in two years and only pay $11,805. That’s a saving of $24,528.

The message is: pay off as much as you can afford when it comes to high interest debt, such as credit cards to pay down your debt as fast as possible and significantly reduce the total amount you will pay in the long run.

Balance transfer

Arranging a balance transfer is another great way to get on top of your credit card debts. This is a strategy that involves transferring your credit card balance from a high-interest card to a low-interest or zero interest card and trying to pay off as much as possible during the special low-interest or zero-interest period.

It is important, however, to understand the terms and conditions of credit card products such as these, as the interest rate will increase to the standard variable rate applicable to the credit card after the special interest conditions end.

Pay in full during interest-free period

Another way to get on top of your credit card debt is to pay off the amount in full before the end of the card’s interest-free period. Be aware that the interest-free period does not start from the time you make a purchase, but instead, at the start of each statement.

Many cards have an interest-free period of up to 55 days, so if you buy something at the start of each statement’s interest-free period, you will enjoy 55 days interest-free. The interest-free period may not apply to cash advances and balance transfers.

3. Check you’re on the lowest possible home loan rate

With interest rates at record lows, home loans have never been more affordable. Surprisingly, however, a large number of us don’t check we’re on the lower possible rate, or, ask our bank for the best rate it can give us.

If you have a mortgage, now is the time to contact your lender to reduce your interest rate, if possible. If you are able to drop the rate you pay, you could save thousands over time and pay off your home loan faster.

Next: How debt can help you build long-term wealth

References

https://www.abc.net.au/news/2019-10-18/household-debt-leaves-australians-working-longer-spending-less/11608016
https://tradingeconomics.com/australia/households-debt-to-gdp
https://moneysmart.gov.au/credit-cards/credit-card-calculator
https://asic.gov.au/about-asic/news-centre/find-a-media-release/2018-releases/18-201mr-asic-s-review-of-credit-cards-reveals-more-than-one-in-six-consumers-struggling-with-credit-card-debt/
https://www.finder.com.au/the-average-home-loan-interest-rate
https://www.canstar.com.au/credit-cards/low-rate-credit-cards/
https://www.canstar.com.au/personal-loans/personal-loan-interest-rate-ranges/