Ways to eliminate debt: tips and tricks from experts

Reducing your debt will make a world of difference as we navigate the cost of living crisis. Here’s expert advice on how to do it.

To work towards eliminating debt, it’s important to understand that not all debt is created equal.

This is the view of financial educator and founder of My Financial Adulting Plan, Melissa Browne, who says debt falls into four categories: really freaking awful, bad, OK and good.

“Really freaking awful debts are your payday loans. Bad debts are personal loans, credit cards and buy now and pay later schemes,” Ms Browne said.

She suggests transferring credit card debt to a zero interest card, cutting it up and paying it off before the interest-free period expires.

Claire Frawley, personal finance expert at Mozo, understands consumers want to chase points on credit cards.

“Consolidate your debts to one card and make those repayments before spending on the points card. The repayment of the debt is the priority,” she said.

“When spending on the new card, ensure it’s an amount you can pay off every month.”

Ms Browne recommended avoiding buy now, pay later schemes – even if you don’t pay interest.

“After Pay advertises to its clients that the average spend goes up 40 per cent when sites offer it. You’re paying by buying things you don’t need,” she said.

Mortgages are considered OK debt.

“If you’ve had it for more than 12 months and have more than 20 per cent equity, ask for a discount on your home loan rate,” Ms Browne said.

“The average interest rate reduction is 0.5 per cent, last month a client got 1 per cent knocked off, which equates to $13,000 a year.

“People think if interest rates are going up, you can’t ask for a discount. You absolutely can.

“A client’s bank wouldn’t do it, she went to swap and her bank then offered a rate reduction.”

Ms Browne said good debt was for an asset that made you income, gave you a tax deduction and went up in value, such as shares or an investment property.

If you’re paying an extra 1-3 per cent off your mortgage and have a buffer of three months’ living expenses, she says it’s time to invest. “Make the investment loan interest only,” she said.

“If you have a mortgage and an interest-only loan, you can put the extra repayment into the mortgage so the right debt – the one not making you any extra money – is paid off first.”

WAYS TO REDUCE YOUR DEBT

● Pay off the debt with the highest interest rate first.

● Avoid payday loans at all costs. It’s a “really freaking awful” debt where you’re charged ludicrous rates of interest.

● Switch credit card debts to a zero-interest option and pay the debt before the zero-interest period expires.

● If using a credit card to accrue points, don’t spend more than you can pay off every month.

● Close any buy now, pay later accounts such as After Pay. They encourage you to spend more.

● Pay an extra 1-3 per cent off your mortgage to reduce the debt.

● Banks want your business, demand a better mortgage rate. A one per cent reduction could be a five-figure saving.

● To create financial independence, you need to invest and take on good debt that creates an income.

● Convert investment loans to interest only. You can then put what would have gone on the principal towards a bad debt.

● Look at finding more income streams to boost your finances and the amount you can pay off.

KEY ADVICE CLARE’S SAVOUR

Clare Elsworth has paid back tens of thousands of dollars of debt. Picture: Tim Hunter.

Grief sparked Clare Elsworth’s debt spiral. She started spending unsustainably when her sister died at just 37.

“My son was three years old at the time. I lived as though I may not get old and wanted to cram as many good memories into our lives as I could,” she said.

A failed small business also contributed to the 44-year-old Sydneysider’s debt.

She met Melissa Browne (My Financial Adulting Plan founder) at a Business Chicks function and, with her help, has paid back tens of thousands of dollars of debt.

“She taught me to say no to the happy fix shopping purchases, to the out of budget social occasions and yes to the things that would serve my son and I in our future,” Ms Elsworth said.

“I’m relieved I have my money under control and I’m dedicated to keep improving on being financially secure for my son, who is now 12.

“Through watching me, I hope he is learning to be a mindful spender and understands that financial decisions you make now have an impact on your future.

“He is part of our savings for big things like holidays and is learning good financial habits that I picked up from Mel.”

Originally published as Ways to eliminate debt: tips and tricks from experts