Masterclass

Be MoneyBrilliant – Managing your money Step 6

Published on November 3, 2015 10:44 am, by

Step 6 – getting rid of bad debt

Phew!  You made it through step 5.  For me that has always been the most work.  Once you’ve done it though, you just need little check-ins.  Keep all your papers, that way you don’t ever need to start all over again.

On to Step 6 – I expect everyone has heard the saying “bad debt”.  So what is bad debt?   Bad debt refers to all sorts of things, with negative connotations.  For our purposes we will say that bad debt is any loan or credit facility that doesn’t have an asset attached.  So to simplify further, a good debt would be a house or loan secured by shares, where a bad debt would be a credit card or personal loan.

Today we are looking at personal loans and credit cards.  Right now if you have neither (or any other unsecured debt), skip on to Step 7 and we’ll pick you up there.  If you have a credit card on a 55 days interest free cycle and you pay it in full every month, never paying fees or interest you can skip to Step 7 as well.  All others, stay with me!

Credit cards, credit cards, credit cards.  Where do I start?  We all know they can be so good and at the same time so bad?  They can help us buy whatever we want, whenever we want it.  It doesn’t matter whether we actually have the money or not, because we have the card.

Today it’s time to confront our debt.  Check over your statements, or use your MoneyBrilliant service, and have a look and see how much interest you’ve paid in the last 90 days.  Have you paid any fees?  How much?  How many cards do you have?  Write a list of each card, the limit, the balance, the interest rate, and the last 90 days in interest and fees combined.  And shuffle your list around so the one that has cost you the most is at the top.  Figure out the annual fee, and whether it’s been charged in the last 90 days or not, make it 25% of the annual amount.

For example –

Company

Limit

$

Balance

$

Interest

90 days

$

Fees 90 days $ Annual fee 25%

Total cost 90 days $

Citibank 20,000 15,800 830 90 25 935
Westpac 12000 11980 599 0 50 645
NAB 8000 8200 410 90 25 525

* Please note figures are for display purposes only

What to do?  What to do?  Right now I’m going to suggest that you decide whether you want to pay them off or not.  There are some great products, balance transfers with no interest for up to 15 months, available.  Before you take one of these up though, you need to commit to closing your existing cards down and putting a plan in place to pay off the debt in the shortest amount of time available.  The maximum you can borrow may only pay off one credit card.  Have a look at this your options and have a think.

It’s really important that any strategy you commit to with paying off debt that you follow.  It’s tempting to get a balance transfer and keep your existing cards open, “just in case”.  However what happens then is old habits drift back in and before you know it you are in the same position you were with an additional debt to repay.

So some strategies –

  • Get a Balance Transfer and pay off as much of your debt as you can and close down your existing credit cards
  • Same as above but keep one credit card open with a $2,000 limit for emergencies
  • If the maximum that you can get only pays off one card, do it, repay the card as fast as possible (while maintaining minimum payments on your other cards) and then move on to the next one.

For those who have equity in their home –

Consider repaying the debt with an additional loan using your home as security. The interest rate will be about a quarter of what you are paying.  Same strategy applies, close the cards down, and pay the debt off as fast as you can.

What you are trying to do is lower the charges associated with bad debt, so you can pay off the balance.  The same principal that applies for credit card applies for personal loans.  You really want to find an interest rate that is lower than what you are on (if possible) and direct all the money you save from cutting your spending in to these debts.

The important thing with these strategies is to close your credit cards down and change your behaviour.  Otherwise you’ve just increased your debt and next time you might not get additional finance approved.

From here it’s onward and upward.  If you find yourself in trouble when confronting your debt there are services that will help you do a budget and repayment plan.  If you need help, ask for it!!   

Related Articles –

Introduction
Step 1 – just think about it
Step 2 – be honest about what you do
Step 3 – where does your money really go?
Step 4 – dreams and goals
Step 5 – turning insights in to actions
Step 7 – Review, commit & automate

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Jen is an experienced banking professional who loves wine, coffee, finding a bargain and of course her three beautiful children. Since Jen's first budget led her to buy a home at 20, Jen has passionately helped others to make better decisions with their money.

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