Debt can quickly transition from being a nuisance to dwarfing almost all other concerns if it is left unmanaged or neglected. The following are some handy tips that can assist you to take back control.
Technique #1 – If you must use a credit card, consider a low interest credit card
A safer bet is to keep a credit card with a low interest rate. If you’re going broke then you shouldn’t keep one at all, but if there’s a pressing need for a credit card then simply choose one which has a lower rate. All financial institutions are required by law to provide the purchase and cash advance rates for each card which makes comparing them a fair bit easier.
In your analysis, make sure you include the annual fee and reward point scheme fees. In the market, there are hundreds of credit cards available with various deals so you need to go through them carefully and wisely to strike a decent deal. Several credit cards charge over 20% interest while some charge a meager 10%. The onus is on you to work out which one will work most favourably with your circumstances.
Technique #2 – Balance Transfers
If your credit rating is good and you can afford it, it may be worthwhile investigating whether you apply for a low rate or 0% balance transfer. A balance transfer simply involves the switching of your credit card debt from one provider to another. Many banks offer low rate or even 0% p.a. enticements to transfer your credit card debt over to them.
If you are eligible, this can provide you with the breathing room you need whilst you pay down your debts. Watch out however if you have bad credit as it is unlikely that another institution will allow you to apply. Also watch out for high fees after your balance transfer period is over.
Technique #3 - Pay your higher interest debts first
This is incredibly simple. You may have 4 debts: a mortgage, a car loan, a personal loan and a credit card. The interest rates might be 7% pa, 10% pa, 12% pa and 18% pa respectively.
Whilst making sure that you are keeping up with the required repayments each month, it may be worthwhile to pay down the debt of the highest interest loan faster, in this case the credit card. That way you reduce your interest bill faster and can use the savings to start reducing debt on your other loans.
Technique #4 – Remember, there is no such thing as "Reward Points"
Often the way to win a client’s heart is by using the most interesting (and impractical) offers. Reward points can have very little value over the long run (especially if you don’t spend enough to reach any offers and your points have an expiration date). You are required to pay an annual fee to enter the scheme. It is often a month’s interest rate. So you are paying money worth 13 months of interest. Several cards even get people to spend at least $20,000 on them. Make sure you read the fine print first before joining any of these
Technique #5 - Negotiate with Creditors:
If you are risk of falling behind on any of your repayments it is best to contact your creditors before they contact you. It could be that you have been injured or sick or lost your job. They may be willing to offer a moratorium on your repayments. The banks are governed by the UCCC and the national credit code. There is a hardship provision that many banks have adopted that may provide relief for consumes with temporary income interruptions.
Waiting for your creditors to contact you can end up being much, much worse. If a default is registered on your credit file it can dramatically reduce the number of finance providers that will be willing to do business with you.
Technique #6- Prepare a budget:
Having a budget and keeping track of your expenses can help prevent you from going into debt and help you to get out of it. You may be unaware of areas of expenditure that can be reduced or perhaps idle money that could be earning a greater return.
The bottom line is that you have no way of controlling your expenditure until you are aware of how much you are spending each month.
Example areas of expenditure can include:
- Rent/Home Loan Payments
- Other finance costs
- Electricity / Gas
- Telephone/Mobiles/Internet
- Newspapers/Magazines
- Alcohol/Cigarettes
- Transportation/Car costs
- Food Shopping/Takeaways/Snack Food
- Clothing
- Socialising
- Luxury items
By monitoring your expenses you can help discover weaknesses in your monthly expenses and also highlight deals in place where you can save money. You should investigate alternative suppliers in areas such as internet, electricity, phones, finance and see if you can save money.
Technique #7 - Consolidate or Resolve:
If you have multiple high interest debts, you may be able to obtain a new loan to pay out all of your existing debts. This type of loan is called a debt consolidation loan.
There are two types. Unsecured and secured.
An unsecured debt consolidation loan is essentially a personal loan that pays out your unsecured debts such as other personal loans and credit cards. The process is simple. You take a lower rate loan than what you are currently on. This pays outs your other loans and you pay less interest on your new loan.
A secured debt consolidation loan is the process of using the equity in your home to pay out high interest unsecured debts such as credit cards personal loans. The consolidation loan in this form is a mortgage. As the mortgage is secured against your house, you can usually get a much lower rate than your credit card. It is incredibly important that you address your spending habits if you are genuinely considering taking out one of these loans.
In your calculations you will need to take into account any exit / establishment fees that may negate any interest rate savings.