How to escape the debt trap

As we look down the barrel of 2012, plenty of Australians are struggling with debt. Now is the time to take action with simple strategies to clear the slate.

If your personal debt levels are creeping up, you're not alone – many Australians continue to battle mounting debt. A recent white paper by industry super fund REST for example, found that Gen Y Australians are accruing debt earlier than their predecessors.

Middle Australia is battling too. More than 35,500 Australians sought formal help from the government's insolvency service last financial year, with the majority aged between 35 and 45.

In fact, a study by data intelligence company Veda confirms that 82 percent of Australians are worried about their ability to meet debt repayments, up from 75 percent in 2010.

Help is at hand

If you are battling ballooning debts, it is important to realise that help is available. A sensible first step is to speak to your creditors before skipping a bill or mortgage repayment altogether. You may be able to negotiate a manageable repayment plan – one that fits your budget. Avoid taking on fresh debt to pay off what you already owe as this could be the start of an escalating debt spiral.

Consider bundling multiple debts into one

Consolidating multiple high interest debts into a single personal loan can make your debt more manageable while providing fixed repayments that are easier to budget for. Be aware this strategy will only work if you resist the urge to take on fresh debt, including reloading your credit card with new purchases.

Take the knife to card costs

If your credit card was maxed out over the holiday period, it's worth looking at ways to get the balance back under control. The golden rule here is to disregard the card issuer's specified repayments and pay as much as possible off the card.

The majority of credit cards require only a 2 percent minimum monthly payment, and with personal card rates averaging around 17 percent, the mounting interest bill will see the debt grow rapidly even if you stop using the card altogether. Increasing your repayments by just 1 percent of the outstanding balance can halve the time it takes to pay off the debt.

A low rate balance transfer deal can help you get ahead with your card though be sure to choose the offer that matches your budget. There is not much point opting for a card charging 0 percent for 6 months if you really need 12 months to make a serious dent in the balance.

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