When you’re in debt, there often seems no way out. How do you make your money stretch further to not only make the repayments, but get your debts under control? While we read a lot about bankruptcy, there are other debt solutions – but they take time, diligence and dedication.
There are no quick-fix solutions for debt management, despite the ads you might see on television that suggest one phone call can solve all your problems. Yes, you might get a lump sum to solve your short-term crisis from that one phone call – but these companies generally charge high interest rates so, in the longterm, you’re buying yourself a bigger problem.
True debt-management might take a little longer to achieve, but, if you do it right, you’ll be on top of your debt now and in the future.
1. Get Serious – If you’re serious about getting on top of your debt, the first thing to do is to stop adding to it. Cut up your credit cards, store cards and anything else that allows you to spend money you don’t have. Ignore seductive “interest-free for 20 months” deals – buy it in 20 months when you can afford it.
2. Do a debt assessment – Do you have a clear idea of what you owe? This is where you get out all your statements – credit cards, store cards, car loan, home loan – anything where you owe money and add it all up.
3. Know your interest rates – Credit card interest rates vary from around 12 per cent up to 20 per cent and above. Do you know how much you’re paying? What about on your home loan? Car loan? As well as knowing what you owe, you need to understand how much it is costing you.
4. Tackle the high-interest debt first – If you have two credit cards and one is costing you 20 per cent per annum and one is costing you 14 per cent per annum, aim to pay off the card with the higher interest rate first. Car loans are another high-interest debt that you should aim to pay off as quickly as possible.
5. Always pay more than the minimum repayment – If you pay the minimum repayments (usually around 2.5 per cent of the total) on a $3000 debt, assuming an interest rate of 16 per cent, it will take you 19 years and two months to get a zero balance (and cost you over $3000 in interest!) – and that assumes that you put nothing else on the card. Every little bit extra that you can throw at the debt will reduce the time (and the interest paid!).
6. Find the extra money by doing a budget – It always comes back to this with money, doesn’t it? Just as you need a clear idea of what you owe, you also need a clear idea of what you’re spending. You’re looking for money to redirect towards your debt. Learn more about family budgeting here.
7. If you have debt, you have no savings – Many people make the mistake of carrying credit card debt and trying to build up their savings at the same time. There’s not a lot of point in having savings (earning 5-7 per cent maximum) and carrying a lot of credit card debt (at 12 per cent to 20 per cent). Use your savings to pay off as much debt as you can and continue to redirect that money until the debt is gone. Once your balance is at zero, you can direct the “savings” money as well as any money you used to spend on monthly debt repayments into your savings account.
8. Transfer your credit card balance – If your credit card debt is sitting at around $3000 or more, you might want to consider transferring the balance to a card that attracts a lower interest rate. Many institutions offer “balance transfer” specials, where you might attract a special interest rate of 0-3 per cent for up to six months, giving you time to make some inroads.
With any balance transfer offer, it’s important to remember not to use the card at all during the “honeymoon” period. Any purchases you put on the card during this time will attract the full “revert” rate (the rate of interest charged on the card after the honeymoon period). Not only that, but if you have a balance of $5000 and you spend $100 during the interest-free or low-interest period, any repayments you make will go to the $5000, leaving the $100 to quietly accrue interest at up to 21 per cent.
9. Consider consolidation – Taking out a personal loan to cover your debts can work well. Personal loans often attract a lower interest rate than credit card, store card and car loans, and have the added benefit of set repayments that are designed to pay off the card within a certain period of time (unlike minimum repayments on a credit card). If you follow this course of action, it’s vital that you cut up your credit cards – otherwise you may end up with a $10,000+ personal loan – and new credit card debt.
10. Consider extending your mortgage – The other alternative to consolidation for those with a home loan is to extend your mortgage to cover your debts. Mortgages attract much lower interest rates and, once again, have set repayments. The key, if you choose this course of action, is to try to throw as much money into the mortgage as possible until the “extension” is paid down. Otherwise, you may end up paying off your $5000 credit card debt over 30 years – and that can be very expensive in interest charges.
If you need help with debt management, why not contact a financial advisor? There are many free financial counselling services available, offering debt solutions, as well as help with financial literacy (understanding your money). To find a financial advisor in your area, visit the New Zealand Institute of Financial Advisers.