Eight ways to help you reduce your debt levels
Australians are carrying mountains of debt which can cause immense stress. Here are some simple tricks to reducing how much money you owe.
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Australians’ addiction to debt can’t seem to be shaken, so it’s time to consider a plan B.
Households collectively took on an extra $80 billion of debt last year, according to Reserve Bank data, and now owe a combined $2.47 trillion.
Three quarters of households owe money and many succumb to debt’s dark side amid an ever-increasing spiral of high interest rates and unnecessary fees and charges.
If you can’t avoid debt, plan to pay it off as fast as possible to reduce the financial drain.
While credit card use has been dropping, many consumers have switched to new payment systems such as buy now, pay later schemes including Afterpay and Zip Pay.
Roy Morgan research says almost two million consumers used these schemes in the year to September 2019, up 41 per cent in just 12 months.
It’s clear that consumer debts aren’t going anywhere, so the best method of defence is to attack your loans. Here are eight ways to do that.
1. PAY OFF EXTRA
It’s simple and it’s the fastest way to cut debt quickly. Every extra repayment not only lowers the total amount owing, but also reduces the interest component you are charged each month, and increases the proportion loan principal repaid.
Financial services group William Buck’s finance manager, Malcolm Anderson, said extra repayments could be done in one-off hits from surplus savings or by increasing regular repayments.
The end result is the same – a debt that disappears faster.
2. AVOID INTEREST-FREE TRAPS
The slick approach from retailers can be compelling – buy now and pay no interest for six months, or a year, or longer.
But you’ll still have a debt, and if life gets in the way of you paying it off within the prescribed period you can be slugged with high fees and interest.
“Be mindful of interest-free period offers for large retail purchases and ensure you have paid for the item within that interest free period,” Mr Anderson said.
The Australian Securities and Investments Commission says interest rates on these interest-free deals can be up to 29 per cent.
It says some businesses offer “no interest ever deals” but they can come with establishment fees, payment purchasing fees, monthly service fees and late payment fees.
3. COMPARE AND SAVE
Mr Anderson recommended shopping around for a better loan product and price, or contacting a finance broker who could do it for you.
“There is still a general misconception out in the broader community that all lenders are the same,” he said.
“The reality is there can be quite significant differences among lenders, their products and level of service – all of which can impact on someone’s ability to reduce debt effectively.”
4. SEEK HELP
“Finance can be quite a complex and confusing area for those trying to navigate alone,” Mr Anderson said.
“A lending adviser can help in assessing the various options to identify the best strategy for your individual circumstances.”
People can also get advice from their lender or from free financial counsellors by phoning 1800 007 007.
5. HIT HIGH-INTEREST FIRST
The best debts to attack quickly are those that charge you the most – such as a credit card or a store card.
Pay off anything with an interest rate above 20 per cent long before you think about putting extra money on your mortgage, which is probably charging less than 4 per cent interest.
People’s Choice Credit Union spokesman Russell Emmerson said credit cards were “debts that do nothing except eat away at your income”.
He said mortgages and HECS debts should be left until last.
6. HAVE A BATTLE PLAN
Mr Emmerson recommended listing each debt you have and how much it was costing you every month.
“It will highlight just where your debt is hurting you most,” he said.
This “debt hit list” would reveal where you stand and the next steps you could take, Mr Emmerson said.
“Don’t flinch away from the facts. It’s better to know what you face so you can work on it constructively rather than shy away and continue to deal with the consequences.”
7. CONSOLIDATE DEBTS
People could cut their debt faster by consolidating high-interest loans – such as credit cards – into lower-interest loans such as a mortgage, Mr Emmerson said.
“This is only a solution if you have the discipline to avoid creating new debts,” he said.
“If you start accruing more debt on a new credit card or a buy-now-pay-later scheme, you are actually increasing your exposure.”
Aim to maintain or increase repayments after consolidating, otherwise the original credit card debt will hurt you for years.
Marketplace lender SocietyOne’s spokeswoman, Melissa Cicero, said it could be worth consolidating into a lower-interest personal loan.
“There’s an end date in sight and feels awesome when you make that final payment,” she said.
8. SPEND LESS
“No one gets up in the morning wanting to be in debt, but things happen and sometimes it’s unavoidable,” Ms Cicero said.
She said people could reduce debt faster by being disciplined about what they bought.
“Keep your spending within your budget, try to avoid impulse purchases, and save for major purchases rather than borrowing for them,” Ms Cicero said.
“Avoid buy now, pay later, interest-free financing and offers that postpone debt,” she said.