manage debt

Understand and Eliminate Your Debt

Gino FarinaMy Financial Health

There are many types of credit products that we all have. Each one gives you access to funds, but you have a legal obligation to repay the money, generally with interest. To successfully reach your financial goals, you will need to identify all the credit you have, and then put together a plan to eliminate your debt.

Types of Credit You May Have

Outlined below are some examples of the different types of credit and loans that you may have, and some ways that you might be able to reduce or eliminate it:

Credit Cards: A credit card can make impulse buying easy, as you aren’t using your own cash or savings. However, be careful you don’t overdo it and pay as much off as you can, not just the minimum. Keep in mind that you’ll also have to pay your card’s annual fee.

If you can, pay the entire amount owing by the due date to avoid being charged interest as well as improve your credit score. At least pay the minimum before the due date – use an autopay or direct debit option to make sure don’t miss a payment. Even making additional repayments can help you save on interest, which is calculated daily. Did you know that not paying your credit card on time will also reduce your credit score and record it as a late payment?

Store Cards: Some retailers offer store cards that can get you discounts, earn reward points and provide short-term financing on purchases. Please ensure you use them wisely as the interest charged is often higher than credit cards.

Before you get a store card, make sure to check the fees, check the terms and conditions and limit the number of cards you have at any one time.

Personal Loans: Personal loans can be useful for buying one-off big items, like a car, if you don’t have enough money to pay for it. Regular repayments are set to ensure you pay off the debt in the term provided. This can help with budgeting because you have to make regular payments and it may be cheaper than using a credit card.

To pay off your personal loan sooner, you could make additional repayments, choose a short repayment term, set up automatic payments or move the remaining debt to a 0% credit card.

Interest-free Deals: Many stores offer interest-free deals that let you take the goods home before you’ve fully paid for them. However, there are still fees and charges you must pay. If the balance is not paid in full within the interest-free period, interest will be charged on the outstanding amount.

Interest-free Online Shopping – Afterpay/Zippay: Some online retailers allow you to shop now and temporarily delay payment, either until you receive your goods and are happy with them, or by allowing you to pay by instalments over a short period of time. These interest-free online shopping payment services are offered by separate companies, like Afterpay or Zippay, to the retailer.

Payday Loans: Payday loans are for $2,000 or less and you have between 16 days and a year to pay them off. The cost of a payday loan is generally higher than for other loans.

Car Loans: A car loan is a popular way to finance your new or used car. To pay off a car loan sooner, and avoid making payments on a car that’s not worth even half as much, you can make extra repayments, reduce the extra fees and charges on the loan, or refinance the car loan altogether.

Student Loans: Students often take out student loans to help pay for their tuition. To get a better interest rate and payment terms, you can refinance your student loan, or even consolidate multiple loans so that you’re paying one monthly payment instead of two or three.

Mortgage: A Mortgage is possibly one of the largest debts you will incur. But there are a few ways that your repayments can stay affordable:

  1. Pay the principal amount and interest. This will be more expensive than you regular repayments, however you can save money in the long run.
  2. Change your payment frequency to weekly or biweekly instalments. This will help you save on interest, as interest is calculated daily.
  3. Pay more than is required via either a lump sum repayment or increasing the dollar amount of each of your repayments.

What to Do Before You Borrow Money

Before you start looking for credit, do a budget. The amount you can borrow and repay will depend on your income, expenses and estimated repayments. Keep in mind that your ability to make repayments might change in the future.

  1. Check If You’re Getting the Best Credit Deal

Credit providers are always looking for new business, so make sure you shop around to get the best deal you can: compare different credit providers, their products, features, fees and charges.

For some types of loans and credit products, an ad that includes the interest rate must also show you the ‘comparison rate’. This is the interest rate plus most of the fees and charges you must pay on a loan. It will give you a better idea of how much a loan will really cost you.

  1. Read the Credit Contract

Before you sign up for credit, make sure you read the contract: know what you’re signing up for, who you’re getting the credit from and how much they are charging you. If you don’t understand the credit contract, ask someone to help you understand it – a relative, a teacher or someone at work. Never sign anything you don’t understand.

  1. Check Your Credit Report

A credit reporting agency will have a credit report on you if you have applied for credit in the past 5 years, signed a mobile phone contract or paid a bill of at least $100 60 days or more late.

You should check your credit report every year as this holds your personal details, information about the credit products you have and the credit applications you’ve made, and if your repayments are on time. Credit providers use credit reports to help them decide whether to give you credit.

Get Help with Your Debt

Getting into debt is easier than getting out of it, so before you get a loan or use credit, make sure you understand what you’re signing up for. If you’re having trouble repaying your debts, get help immediately. If you ignore the problem and don’t pay what you owe, you could end up with legal problems or a bad credit report, which could affect your ability to borrow money again. Contact your credit provider as you may be able to organise an agreed repayment plan.

Find out more on my Wealth Portal, or if you’d like to discuss your personal circumstances further, please contact me today.