Credit cards, personal loans, and mortgages. While it may seem easy to use debt to fund your lifestyle, as you go through life, higher interest rates, workplace interruptions and other life changes can make it much, much harder to repay that debt.
A few simple tips can make managing your debt a lot easier.
Taking Stock of Your Debts
First, know exactly what debts you have. If necessary, write a list of every debt you have, detailing the exact amount outstanding, and the rate of interest being charged, including the dollar amount charged each month and the time required to repay that debt.
If you are unsure of any of these details, contact the debt provider so you can make this list as accurate as possible.
Unravelling Interest Rates and Charges
Second, understand the exact rate of interest you owe on each debt and how this interest is charged against your account. Typically credit cards will attract the highest rate of interest but will only do so if you don’t pay the full amount owed each month.
While the annual interest rate charged on a credit card is usually very high, it is typically charged daily, so the actual amount charged can be much higher than you expect it to be. Each credit card will have its own interest rate rules and can have different rates for cash withdrawals compared to normal purchases.
In comparison, the interest rate on your home loan is typically much lower and simpler to work out. While it is charged on the daily balance, it is usually added to your loan on a specific day in the month so it can be easy to reduce your overall interest charges by paying more regularly, fortnightly for example, rather than monthly.
Be aware of any additional charges relating to any of your debts. These might include late payment fees or other penalties should you miss a payment date and depending on the debt, can be very high.
Penalty fees can be a big issue with buy now, pay later finance. Typically, the charges associated with this debt are carried by the retailer or service provider, but should you miss a payment, you can find yourself paying significant penalties on these loans.
Prioritising Debt Repayment
Some people like to pay off their smallest debts first, however, this only makes sense if they are also your most expensive (with the highest percentage interest rate/fee) debts. Focus on repaying the highest interest rate/fee debt as quickly as possible. Once this debt is repaid, then you can divert the payments you would normally pay to that debt, to the next most expensive debt and repay that debt as quickly as possible.
Exploring Debt Consolidation
It is possible to consolidate expensive debt, typically credit cards, into cheaper debts such as your home loan and this can make good sense, but only if you are disciplined and can stop using your credit card to fund new purchases you can’t afford to repay in full each month. Otherwise, this can be an easy way to make your debt burden even worse.
Upholding Timely Debt Payments
Ensure you always make your debt repayments on or before the due date. This is important as it will impact on your credit rating, which the banking system generates for every Australian who borrows money.
If you pay your debts on time, then your credit rating will be high, and you will be able to obtain credit at cheaper rates. If you let your credit rating slide, you will face higher interest rates and, in some cases, might not be able to borrow at all.
Seeking Help When Necessary
Finally, if you are having trouble repaying your debts, contact the credit provider directly as they may be able to offer you some assistance in terms of reducing the rate of interest being charged or freezing all interest charges for an agreed period of time.
