Debt management

Feel freedom after defeating debts

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If you’ve taken a look at your finances recently, you may have found yourself with a few debts.  While it’s possible to pay them off by simply keeping up your minimum repayments, you may want to get them sorted quicker.

If so, here’s a few simple steps to help you pay off your debts sooner and strengthen your savings.

Know what you owe

The first step to get started is to know what you owe.  This means making a list of all of your debts, and the interest rates of each.  Make sure to organise them from the largest interest rate to the smallest.  You’ll probably want to repay the higher interest debts first, because they can cost you the most to borrow over time.

Once you’re clear on your repayments, and where most of your repayment money is going, you’ll be ready to create a plan.

Make some cutbacks

When it comes to saving money, it’s important to identify where you could cut back your spending.  It may feel tricky, but to get your debt paid off faster, you need to be on-top of your outgoings. So, make a list of all of your spending to see where you could make some cutbacks, and free-up some cash.

Set a budget

Once you know how much you owe, and where you can make cutbacks on spending, you can give yourself a budget to work with each month.  You may find budget calculators helpful, because they can do a lot of the hard work for you.  Through following your budget, you may be able to free-up some extra cash each month to put towards your debt, additional to your minimum repayment.

Grow your savings

It may sound silly to start saving when you’re focusing on making repayments but once you’re in a rhythm, it’s time to think about the future.  In order to become (and stay) debt-free, you need to stay in control of your spending.  A great way to do that is to have a little rainy-day fund set aside for unexpected circumstances.

So, as you start making repayments, pop a little extra into your savings account, to get yourself going.

Source: ING

How to get out of debt

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In Australia, we’re pretty big on borrowing money.  According to figures published by Finder, Australia takes the number four spot in the top five countries with the highest levels of household debt.  So if you’re in debt, you’re certainly not alone in owing money.  As long as you’ve got money coming in to meet all your financial commitments, including loan repayments, being in debt doesn’t have to be a problem.

But falling behind on those payments, or finding yourself juggling too much debt along with bills and rent, can lead to serious short and long-term financial stress.  In this guide to getting out of debt you’ll learn about the steps you can take straight away to deal with debt problems.  You’ll also find out what to expect if your debts or bills remain unpaid.

What to do if you can’t pay

The most important thing when it comes to getting on top of debts is to act quickly.  Take one or more of the following steps as soon as you become aware that you’re struggling to keep up with payments. This gives you more time to understand your options and make the right decision without putting yourself under extra pressure.

  • Speak to your credit provider: contact your loan, credit card provider or utility company as soon as you can.  Even if you’ve already missed a payment, there’s a good chance you can speak to someone about coming up with a new installment plan you can afford;
  • Apply for a hardship variation: if you’re unable to keep up with payments because of unemployment, ill health or changes in your financial circumstances, you could be eligible for a hardship variation.  You can phone your provider to begin this process, but may need to make an application in writing.  The Financial Rights Legal Centre offers sample letters you can use for a hardship variation and for other situations like dealing with debt collectors;
  • Speak with a financial planner: when your finances get out of control, dealing with debts and unpaid bills can be scary and isolating.  If you’re confused about what to do, speaking to a financial planner could be the best course of action.  You can hear more about your options and find out about your rights and responsibilities when it comes to dealing with debt collectors and any legal action against you as a result of your debts.

Accessing super to pay debts

It’s generally the case that you can’t withdraw any of your super until you reach your preservation age.  However, there are two ways you may be able to gain early access to your super to pay off debts. The first is access on compassionate grounds, which includes ‘making a payment on a loan or council rates so you don’t lose your home’ as a legitimate reason for early access to a lump sum from your super.

You may also be able to withdraw super early on the grounds of severe financial hardship.  The Department of Human Services website provides guidance on what is considered to be financial hardship. You’ll need to apply to your super fund to make any arrangement for early withdrawal on these grounds.  It’s well worth speaking to a financial counsellor before making a decision to apply for early access to super as this could impact your future financial security in retirement.

What can happen if you don’t pay

  • Credit history: unpaid debts or bills that have been outstanding for more than 60 days will be included on your credit history for five years, even after the debt or bill has been paid.  When your provider is unable to contact you to request payment, this stays on your credit history for seven years. This will lower your credit score, which can impact your future ability to borrow money;
  • Repossession: when a loan is secured on an asset, such as your car or home, and you miss a repayment, a lender may take action to repossess that asset.  Once you’ve missed a payment, a lender must issue you a default notice and then give you 30 days following the date of issue to pay the overdue amount before taking steps to repossess the asset;
  • Debt recovery: if you do not make an installment plan for overdue debt or bill payments, or take any other steps to repay money you owe, your provider may arrange for a debt collection service to recover the debt.  Debt collectors are required by law to operate within strict guidelines in how they can contact you.  If you are experiencing threatening or intimidating behaviour from a debt collector, you can make a complaint to the Australian Financial Complaints Authority (AFCA) or your credit or service provider.

What to do about debt recovery

Unless you dispute a debt – and you can do this if you believe you don’t owe the money you’re asked to repay – it’s important to communicate clearly and honestly during all stages of a debt recovery process.  If you don’t, it’s possible your credit provider will seek judgement from a court to issue a garnishee order to recover the debt directly from your bank accounts or your salary payments.  The ATO can also take this action to claim unpaid taxes without seeking judgement from a court.

How long can debts last?

Unpaid debts can stay on your credit history for up to seven years, even once they’ve been paid in full.  In most cases, debts are consider ‘statute-barred’ if no payment has been made on the debt within the last six years and there has been no court judgement regarding the debt.  So if you have an ‘old’ debt and receive a request for payment, seek legal advice before agreeing you owe the debt or making any payment.

Source: FPA Money and Life

7 ways to reduce your credit card debt once and for all

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If you’ve realised you might have a problem with your credit card debt, it’s time to take back control.

Sit down, take a deep breath and work out a step-by-step plan.

  1. Stop all but essential spending on your credit card.  Try and get by without your credit card and use cash wherever possible while you work on your plan.  You could even set yourself a challenge not to spend any money for a week!;
  2. It sounds basic, but start by listing how many cards you have and what you’re paying for them in interest;
  3. If you have more than one card, start chipping away at the low-hanging fruit.  Consider paying the card with the highest interest rate off first or if the rates are similar, work on clearing the smallest debt;
  4. If you can’t pay a card off in full, see if you can pay more than the minimum each month to reduce your balance more quickly and save on interest.  It could be worth setting up a direct debit on your payday to pay a fixed amount;
  5. Once you’ve paid off a card, close the account and work towards having a single card to help make your finances easier to manage;
  6. If you feel that your interest rate is too high, you could consider transferring any remaining balance to a card with a lower interest rate or rolling the debt into an existing personal loan or mortgage, these tend to have lower interest and fees.  Many providers offer great rates to consolidate, but make sure you pay the card off during any honeymoon period with the new provider so that you don’t start accruing interest.  Check the fine print—what interest rate will you pay after any promotional period ends?  You don’t want to just kick the can down the road;
  7. If all else fails, don’t be afraid to ask for help from your credit provider.  There may be a way you can work out a spending plan that takes into account your financial circumstances.

But how do you make sure you don’t fall into the same credit trap again?  It’s all about developing more healthy financial habits.

  • Reduce your credit card limit(s) to take temptation off the table;
  • Try not to use credit to pay for the basics like food, groceries and utility bills.  See if there are any ways you could adjust your household budget or make savings elsewhere so you’re only using credit as a last resort;
  • Avoid cash advances because they may attract higher interest rates;
  • Be wary of store cards and any fees you’ll pay – they are just another form of credit card;
  • Keep track of your spending.

Don’t forget to take advantage of credit card reforms

  • You can cancel your card or lower your limit online for all new accounts;
  • You won’t be charged any back-dated interest, and;
  • You’ll be assessed on your capacity to repay your debt when you ask for an increase.

Once the credit card’s sorted, it could be time to move on to any other debts you might have.

Source: AMP News and Insights, 18 December 2018