The phone keeps ringing and you’re scared to answer it, because your debts have piled up to the point where you don’t know what to do about it anymore. It’s an understandable fear, but there’s no need to feel like you’ve lost control. There are ways of managing your debts, and ways in which you get get help.
The phone constantly ringing is usually the final step in a long list of warning signs that financial stress is creeping up on you. Other warning signs include:
- You are constantly worrying about money
- You feel as though saving money is impossible.
- Keeping up with loan payments is getting tougher.
- Bills are often overdue before they are paid.
- You are regularly borrowing money from family or friends.
- You often overdraw your account.
- Your credit card is maxed out and you have no way of paying it off.
Any of these situations means that you need to take a hard look at your finances. It is much better to address any issues as soon as possible, rather than waiting for debt collectors to start chasing you.
You aren’t alone. The Australian Bureau of Statistics report into household debt found that total household debt stood at $1.84 trillion at the end of 2013, equivalent to $79,000 for every person living in Australia at that time. This was higher than it had been at any time in the previous 25 years, even after making adjustments to remove the effect of general price inflation (thereby giving a ‘real‘ comparison).
The rate of increase in real household debt per person has slowed since the onset of the Global Financial Crisis (GFC) in August 2007. After increasing at an average of 10% per year between mid 2001 and mid 2007, real household debt per person rose at the much slower average annual rate of 2% between mid 2007 and the end of 2013. This slowdown may, in part, reflect the tightening in mortgage lending standards after 2008.
The report also looked at how many people were behind in their debt repayments. The share of banks’ domestic housing loan portfolios that were either impaired, or at least 90 days overdue edged lower over the six months to December 2013, to 0.6%. This percentage has declined from its 21st century peak of 0.9% in mid 2011, aided by low interest rates and generally tighter mortgage lending standards in the period since 2008. The percentage of impaired housing loans has fallen slightly over recent quarters; the rise in housing prices appears to have helped banks deal with their troubled housing assets, with a number of banks reporting a reduction in mortgages-in-possession. The total number of court applications for property possession declined in 2013 in NSW, Vic., Qld and WA.
The total number of non-business related personal bankruptcies, debt agreements and insolvency agreements was also lower across most of Australia in 2013. Non-performance rates on banks’ credit card and other personal lending, which are inherently riskier and less likely to be secured than housing loans, declined slightly over the second half of 2013 to around 2%, following an upward trend over the previous five years. So it seems that as a nation, Australia is starting to get wiser when it comes to debt, especially in the aftermath of the global financial crisis.
How do I deal with my debt?
When dealing with debt, the first thing you need to look at is how much debt you have; you can start this process by checking your bank statements. Without having an idea about the size of your debt, it’s difficult to work out an appropriate plan of attack. If you have credit cards, payday lending and store credit, then you’ll need to add these amounts into your overall debt pile.
Once you have an idea about your overall financial position, you can start looking at options for making extra repayments and clearing some of your debts. Depending on how much and what type of debt you have, there could be a couple of options open to you.
You could start by:
- paying off the debt with the highest interest rate first; or
- paying off the smallest debt first (so you feel a sense of achievement).
However, there may be some debts that are more urgent than others and require paying first.
You may also consider consolidating your loans into one loan with a lower interest rate. For example, rolling your credit card debt to your home loan will reduce the interest payable from 18% (or more) to 5%. Your bank will advise if this is possible. Assuming you can cover your repayments, the lower interest rate means you’ll pay less interest and pay off your debt sooner.
It is important to communicate with those you owe money to – most will help by implementing a payment plan. The worst thing you can do is not speak to them at all. If you feel you don’t have the confidence to do this, you may need to contact a budgeting service that will do this for you.
Know the difference between good debt and bad debt
Good debt is when you borrow to invest and your investment produces more income than the cost of the borrowing. It’s also good debt if, despite the borrowing costs, the investment is likely to increase in value after you have invested, like property or shares. An education loan is also generally considered to be good debt, as it should enhance your career prospects.
Bad debt happens when you borrow to invest but the value of the investment declines over time, or if you borrow to fund your lifestyle. Bad debts include things like a car loan or borrowing money to pay for an overseas holiday.
We can help you with wealth creation so that you can feel comfortable with your financial future. Contact us today to speak to one of our experienced financial planners.