by Paul Gidley27.12.15

A positive start to 2016 is just what we all need. Aside from new years resolutions focused on getting fit and eating less, the new year presents a good opportunity to refocus on getting personal finances on track.

With a somewhat flat year expected, it’s a good time to trim down the “bad debt” to achieve this resolution.

Firstly not all debt is “bad” debt, there is such a thing as “good” debt, such as:

  • Low interest debt can assist with obtaining assets or increasing knowledge to ultimately lead to an increase in income. Low interest debts are typically debt that is below 10%.
  • Debt that allows you to obtain assets that go up in value. An example of this may be a mortgage secured over a house which may increase in value over time.
  • Debts that are manageable within your budget, those you can afford to take on.

Experts say that ideally your total monthly long term debt repayments including mortgage and credit card repayments should not exceed more than 36% of your gross monthly income.

Bad debt is that which:

  • Carries high interest rates generally in excess of 10%, in most cases credit cards and personal loans.
  • Is used to buy assets that decrease in value. Examples could include borrowing money to go on holidays or to buy luxury items that would be unnecessary.
  • You have trouble making minimum repayments on and get penalties for late payments.

It is important to trim down the bad debts as you might purchase discretionary items on your credit cards but unless you are paying them off you end up paying a lot more for each item when interest and penalties are added.

Ways to trim down the bad debts are:

  • Stay fit with you budget and keep on track.
  • Make payments towards your high interest debts such as credit cards and try to pay more than minimum repayments to keep the interest down.
  • Get organised and make payments on time to avoid unnecessary and unwanted penalties.

Other tips include:

  • It is important to ensure that you are repaying high interest baring debts first to avoid unnecessary interest and penalties. High interest debts are normally credit card repayments with average interest rates between 10-20%.
  • When budgeting try to pay more than just the minimum payments. This will payoff in the long run as $50 per month can make a big difference to the time it takes to repay the full debt.
  • Set up scheduled repayments so you don’t need to think about making payments or worry about forgetting any payments and being penalised.
  • Some banks offer balance transfers where you can take advantage of low interest rates for a short period of time. It is recommended that you read the fine print as if you make purchases on these cards, any repayments made will only offset the balance transfer amount before reducing purchases which can result in high interest being charges on purchases.
  •  Try to take advantage of any pay on time discounts.
  •  Negotiate with your creditors on monthly repayments or hardship applications to stay repayments and interest for a short period of time to get through periods of reduction in income or tough times. Remember that this is only a short term fix and if things don’t pick up then you may need to consult a professional to discuss your options.
  • When borrowing money consider whether:the money will improve financial position in the long run;
    • how in shape your financial position is;
    • are you borrowing money as cheap as you possibly can;
    • can I afford repayments if interest rates increase in the future;
    • are you comfortable with the repayments and able to make the repayments;
    • what are the risks associated if something goes wrong.

If your circumstances change and you feel you can’t keep up with the repayments on mortgage, credit cards or loans it’s important to seek help early from qualified professionals such as charitable organisations (Lifeline and Samaritans have free financial counsellors who can assist with negotiating payment arrangements) or personal insolvency specialists, who can assist with free advice and help with managing unsustainable debt.

The new year is a good time to put plans in place to stay fit and healthy with finances. Make sure you’re finances are atop your list of resolutions!

Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.