EP - 20 Dealing With Debt
With the increasing cost of living affecting most Australian households, it is easy to see why national debt levels are at an all-time high. Unfortunately, too many families rely on their credit card and are living week to week which makes it nearly impossible to get out of debt and get ahead financially. If you find yourself with some or a lot of debt, it is essential that you understand what debt is and what type of debt you have. As it is necessary to be aware that not all debt is the same and there is, in fact, a type of debt that can be good.
Good debt is that type of debt that is your friend and if you are going to have any debt at all this is the type you want.
Bad Debt, the type of debt that unfortunately for most Australians we need to have some of this in our lives to provide us with one of our essential needs which is place to live.
Ugly Debt, the worst type of debt, which unfortunately too many Australian families have too much of and are what causes a lot of stress on the household budget.
Getting out of debt
If you find yourself or your family with a lot of Bad and Ugly debt, it is an excellent idea that you start looking at ways of reducing this. Put in place a plan to restructure/review your personal and investment debt so that it is set in the most tax and cost-effective manner. You may need to hire the services of a professional such a mortgage broker or financial adviser to help with this.
Put in place a plan to clear your outstanding ugly debt in the most time and cost-effective way.
Debt tips:
Make higher repayments
Consolidate your multiple debts into one lower cost debt (if possible)
If you have multiple debts (a mortgage, a personal loan and a few credit cards) Plan which debts you are going to tackle first. Either starting with the debt with the highest interest rate first and working your way down the debt or using the snowball strategy (see below) and attacking your smallest balance debt first and working your way up. Both methods have their pros and cons. It is working out what is going to work for you and your financial situation.
How to use the Snowball strategy to get out of debt:
If you have multiple debts, focusing on the lowest balance first you can get small wins and see some progress quickly:
Pay the minimum on all of your loans and debts, Always!
Pay whatever extra money you have onto the smallest balance until it is gone
Once that debt is cleared, use the repayments you were making on the loan you just removed and move onto your next lowest debt
Continue to capture your repayments, and as your clear, the first debt you have extra repayments to put onto your next debt and your repayment amounts will start to snowball as you continue to pay off your loans.
Questions to ask your home loan or debt providers
Mortgage / Home Loan, When checking your home loan/mortgage it is important to ask the following questions:
Am I paying Principal & Interest or Interest only?
What is my current interest rate?
What is my current comparison rate?
What is my minimum repayment amount?
How much are my current repayments? (if you’re paying above the minimum)
What is the remaining term (years & months) on my loan?
Credit cards, When checking your credit card information, it is essential to ask the following questions:
What is the purchase interest rate that I am buying on new purchases?
What is my minimum repayment amount?
General advice warning: In preparing this article, the contributors have not taken into account any particular person’s objectives, financial situation or needs. Before acting on this information, you should consider its relevance to your personal circumstances.
