What to consider when reducing your debt

Want to pay off your debts and regain control of your finances? Here are some options that may help.

If you’re anything like the average Australian, chances are you have some debt. Consumption debt (other than vehicle loans and credit cards) sat at around $19,500 per household in 2012, while in 2016 we owed $32 billion on credit cards, an average of $4,300 per cardholder.

If you have multiple debts such as credit cards, a home loan, a car loan or an overdraft, you might be able to save money by consolidating your debts. This may result in fewer fees, and it’s generally easier to manage one or two monthly repayments than half a dozen.

Personal loans

Personal loans may help you consolidate debts because their interest rates are usually lower than those of credit cards. Once you’ve used your personal loan to pay off your other debts, you’ll have one set monthly repayment for a set term.

If the loan is ‘secured’, you’ll need to put an asset such as your house or car up as security. An ‘unsecured’ loan needs no guarantee but often carries a higher interest rate. For both secured and unsecured loans, you are still personally responsible for repaying the loan.

Keep in mind the longer the term, the more interest you’ll end up paying. It’s always a good idea to keep repayments up to date to avoid penalty fees, and make extra payments when you can, to save on interest.

Home equity loans

If you already own your home or have been paying off a home loan, you may have built up equity. A home equity loan allows you to tap into that equity – most commonly to renovate or purchase an investment property. Because the interest rate is invariably lower than on a personal loan or credit card, you may be able to use a home equity loan to reduce your debt.

Credit card balance transfers

An equity loan is flexible to use and repay, but it’s important to be extra careful to not miss any payments as a default could put your home at risk. By making more than the minimum interest-only payment each month, you can help reduce the interest overall.
The low rate applies for a fixed time before reverting to standard or higher rates, so make sure you compare different offers to see if the fees, charges and promotional periods are suitable.

The average cardholder pays roughly $700 in interest per year, making it difficult to reduce debt. One way to break the cycle is to transfer the existing balance to a new credit card with low or zero interest rates. Switching your interest rate from 20% to 0% will make an immediate impact on the debt you owe.

Whatever solution you choose for reducing your debt, make sure you pay careful attention to the terms and conditions so you know that the benefits will outweigh the costs.

For more information about your financial options, learn some of the ways you can take advantage of credit cards.