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How to escape the debt trap


Patricia Babalis

By Patricia Babalis

3 min read

If you are one of many Australians struggling with debt there is no better time than now to take action with simple strategies to help clean the slate.

If your personal debt levels are creeping up, you’re not alone – many Australians continue to battle mounting debt.

Latest research shows that at present Australians owe around $32.3 billion on our credit cards combined. On average, each card holder has a personal debt of over $4,000. On top of this, national personal finance commitments are currently at $7.18 billion as at the end of 2015.

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.

Make sure you are getting help from the right places by avoiding payday lenders offering a quick fix. Instead, contact a free financial counsellor, such as the one provided by ASIC, or contact a specific debt advice hotline in your state.

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Consider bundling multiple debts into one

Consolidating multiple high interest debts into a low rate personal loan could 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.

Refinancing a credit card debt into a personal loan may be a more affordable option too. The average advertised credit card interest rate is around 17 per cent, while RateCity data shows unsecured personal loan interest rates below 10 percent.

Take the knife to card costs

If your credit card debt is creeping up on you, it's worth looking at ways to get the balance back under control.

The golden rule here is to pay as much as possible off the card and stop using it for new purchases. Remember that by paying only the minimum repayment amount on your card debt can extend the length of your debt by decades and increase the amount of interest payed by thousands.

The majority of credit cards require only a 2 percent minimum monthly payment. Making repayments at this rate – and based on the average interest rate charged – it would take 29 years and 8 months to clear a $5,000 balance and cost a whopping $15,300 including interest. Increasing your repayments to just 3 percent of the outstanding balance can halve the time it takes to pay off the debt.

A low rate balance transfer deal may help you get ahead with your card though be sure to choose the offer that matches your budget and be sure to read the terms and conditions for the card before deciding whether it’s the best option for you. 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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