Getting on top of Debt

New Zealand households are taking on increasing amounts of debt to finance their lifestyles. Total consumer borrowing by households including credit cards, store cards and personal loans is now over $12.6 billion, a 6% increase on what it was a year ago. Mortgages are not included in this total. With interest rates at a premium and the economy slowing down, those with high levels of consumer debt are extremely vulnerable. Now more than ever is the time to stop spending and get rid of debt. Here’s how to do it.

The most obvious first step is to stop spending on anything that is not essential. That doesn’t mean you have to go without completely, but just postpone your purchases until you are on top of your debt and you’re able to save. Make a list of all your current debts, the interest rate you are paying, and the minimum monthly payment you need to make. Rank them in order, starting with the debt that has the highest rate of interest.

Now look at whether you can refinance any of your debts at a lower interest rate. Get on the phone and search the internet. You may be surprised to find that there are many different rates available from banks and other lending institutions. Here are some options:

Mortgages usually have a lower interest rate than credit cards and hire purchase. You may be able to increase your mortgage to repay credit card debt or an item you have bought on hire purchase.

Assets other than your house – for example, car, boat, insurance policy, furniture and computer equipment – can also be used as security for a loan, so you can borrow at a lower interest rate than for an unsecured debt.

Shop around for a low interest credit card and transfer your other credit card balances onto it

Contact a finance company that offers debt-consolidation to see if you can reduce your interest cost.

Bear in mind that, with some of your debt, there may be penalties if you repay early and additional costs – such as administration and insurance – may be added to your debt if you refinance. These can add considerably to the cost of debt. Now make a commitment to yourself to set aside an amount of your income each week for additional debt repayment over and above the minimum payments you are required to make. Start with a small, affordable amount, even if it is only $20 a week, and gradually increase it if you can. When repaying, start with the debt at the top of your list – the one with the highest interest rate. Keep payments on the other debts at the minimum level, and plough all your spare cash into reducing the debt at the top of your list by increasing your regular payments, making lump sum payments, or both.

Once you have your debt under control, keep it that way by reducing your credit card limit and setting up an automatic payment into a savings account, so you get into the habit of saving the money you need to make a purchase, rather than buying the item on credit. Yes, it’s easier said than done, but having no debt other than your mortgage is the first step towards financial freedom.

September 2008