Falling into debt can happen to the best of us, and it’s an unfortunate position to find yourself in. Whether you’ve racked up a huge credit card bill on your last holiday, or your home loan is getting the best of you, debt is something you can take control of if you follow a few simple steps.
- Highest interest rate first
If you have multiple sources of debt, your assumption may be to pay the largest debt off first. However, experts believe that you should pay off the debt with the highest interest rate, as the interest will sting you far more than the debt itself.
Example: Alice has a $10,000 car loan at 6.5 per cent interest and a credit card bill of $5,000 that charges 17 per cent interest. Experts believe she should prioritise the credit card debt, while still maintaining minimum allowable repayments on her car loan.
- Don’t just pay the bare minimum
If you’re only making minimum repayments on your outstanding debt you’re shooting yourself in the foot in the long term. For credit cards, minimum repayment rates are typically two per cent, or a set dollar amount (around $20). Making higher repayments, or ideally paying off your balance each month, is a key method to get out of debt.
Example: Alice’s $5,000 credit card bill charges 17 per cent interest. If she makes the minimum repayments on her outstanding balance it would take her 29 years to pay off, and cost her $10,015 in interest.
- Switch lenders and save thousands on your mortgage
If the biggest debt in your life is your mortgage, then you should be interested to know that refinancing your home loan can help you to not only reduce your loan costs but help you pay off your loan quicker.
There are currently 531 owner-occupier home loans under 4 per cent on the market. If you goal is to pay your mortgage debt off faster, switching to a lower rate lender and maintaining the same amount of monthly repayments can help you to pay your debt off sooner while saving thousands in interest repayments.
- Buy some extra time
RateCity found that credit card holders who transfer their balance to a new card could save an average of $1,262 in interest and fees, and pay their debt off 6 months earlier*. If you have an outstanding credit card debt you know you can’t pay off this month, but know you could over the next year, a balance transfer might be the solution for you.
A balance transfer allows you to move your existing credit card debt on to a new card. They traditionally offer zero per cent interest rate options from three months to two years, giving you much needed time to pay off your balance. However, you need to be diligent in paying back your debt. If you don’t pay off your balance in your set time you will be hit with a higher than average ongoing interest rate.
Also, keep an eye out for credit card providers who charge a balance transfer fee (usually between one to three per cent). There are plenty of zero fee options available, so use credit card comparison tools to find the right balance transfer card for you.
- Seek free advice from government hotlines
Debt can be an overwhelming and stressful experience that can negatively impact all aspects of your life. If you’re feeling in over your head and don’t want to spend your much-needed money on a financial advisor, it’s worth getting in contact with the National Debt Helpline. They are a not-for-profit service that helps Aussies tackle their debt problems by putting them in contact with professional financial counsellors for free.
According to Financial Counsellor, Anna Dooland, “when you don’t have enough money, it’s easy to feel like you have nowhere to turn. That’s where we come in: we can give you advice about your options. And the best part? Our services are 100% free.”
*Figure: average debt figure of $4,225 based on the total outstanding balance accruing interest (source: Reserve Bank of Australia) divided by the number of card holders (Source: Roy Morgan Research). We have made the following assumptions: the $200 is repaid on time, every month, no new purchases are made, interest rates don’t change on your existing card, and the cardholder meets the lending criteria and is approved for the deal.