Heading into the New Year with your Christmas debt hanging over you is an unsettling feeling. Here are 5 key tips you can follow to save money and reduce your debt quicker, to get you off to a good start for 2019.
Tip 1: Consolidate Your Debts
If you’ve got multiple personal debts, consolidating them can streamline your debt into one single repayment. Personal loan markets are competitive so shop around for a deal that suits you best before making any changes.
Where you have large personal debts and a mortgage, another option to reduce your fixed repayments and interest costs is to consolidate the debt into your mortgage. The interest rate on a mortgage is generally lower than the rates on personal debts, so consolidating can reduce your interest costs. But be aware that moving personal debts into a mortgage generally mean extending the loan term, and therefore paying more interest over the life of the loan. If you use this strategy, you should keep up your original payments to reduce the debt more quickly.
Tip 2: Use Competitive Products
You can pay off your debt faster by getting the best deal on your debt products. Use a non-biased comparison site like Canstar for current credit card and personal loan offers and compare to your existing borrowing products to determine if you can save interest costs and reduce the amount you owe.
Tip 3: Credit Card Balance Transfers
If you’re paying standard interest rates on a credit card, you’re probably paying more than you have to every year. These days, most banks offer balance transfer deals that allow you to ‘move’ existing credit card debt to a new credit card at a low or 0% interest rate. Balance transfers can be a great way to eliminate interest costs so every dollar you pay is reducing the amount you owe. If you are disciplined, this can be a great way to eliminate your debt faster.
There are a couple of things to look out for with balance transfers. Choose a balance transfer card that ideally has no annual fee, and be aware of balance transfer fees that can be charged by some providers. These two costs can be substantial, and because the market is competitive, they could easily be avoided with a bit of research.
Tip 4: Refinance Your Mortgage
Mortgage markets are competitive and constantly changing, so you need to review your mortgage on at least an annual basis. If you’re going to refinance your mortgage, check the refinance fees, as these can range between $500 and $3,000. If you refinance, you should aim to have saved back your refinancing costs within 12 to 18 months. Also check if you’re extending your loan term when you refinance as you could be spreading your repayments out over a longer period of time and therefore paying more interest.
Sometimes if you find a better deal with a competitor, your current mortgage provider may match the rate to keep your business. This means that you can get a cheaper loan without going through the paperwork and hassle of changing. If you find a good rate with a competitor, call your bank and ask them whether they’ll match the deal to keep you as a customer. Or ask a qualified finance adviser to do the legwork on your behalf. For more detail on this topic, go to the blog article: “Refinance Your Home Loan or Get a Better Rate?”
Tip 5: Be Aware of Traps and Risks
Each of the above tips have two main risks you should be aware of: the impact on your credit score, and the debt trap.
Applying for any new loan product and/or changing existing products may create a credit enquiry on your file that can impact your credit score and credit file. You want to have the best deal possible, but at the same time you should be strategic so you don’t have a constant stream of credit enquiries. Look for products that will be suitable for you over a longer time period so you don’t have to switch as often and make sure you know your credit score and how your credit score is calculated. Note that there is no industry standard for credit scores and it may be calculated differently through different providers.
The second potential risk is when you replace or consolidate any debt. If you take out or increase one debt to pay off another, there is the temptation that if you don’t close the debt you were ‘replacing’, you can fall into the trap of continuing to use the credit card or loan product. Make sure you’re disciplined when you make these changes. Cut up the old credit cards and close down the accounts so you aren’t tempted to use them.
Make a Debt Plan for 2019
To make real progress with debt, you need to be disciplined and you need to have a plan. Focus on your goals and make a commitment to reducing your debt now, to get off on the right foot in the New Year. If you need help identifying where and how you can reduce your debt, contact me today.