Money Latest

Is there such thing as ‘good’ debt?

When it comes to debt, women still face significant challenges compared to men.

When it comes to debt, how do women shape up against men? According to the 2023 Status of Women Report Card, women face real financial challenges: A double-digit gender pay gap, a 55 per cent drop in earnings for mothers in the five years following childbirth, and countless hours spent on unpaid work at home – even when a woman is the main breadwinner. 

The good news is that women are smashing these hurdles with sensible money management. Greater Bank found that women tend to be better at maintaining debt repayments, and are less likely to fall behind on home loans. They’re also less likely to have high interest ‘bad debt’ like a credit card or personal loan.

NAB’s latest wellbeing survey backs this up. As the chart below shows, on average, women owe less across almost every type of debt. The catch is that we’re not making debt work in our favour. 

NAB found just 8 per cent of women have an investment debt, such as a loan on a rental property, and the balance owed is far less than for men. This may sound good, but it can work against women. Investment debt – like money owed on a home loan – is ‘good’ debt that can grow personal wealth.

Debt weak spots

There are two areas of debt where women are more vulnerable than men:

• Buy now, pay later: Buy now, pay later (BNPL) lets you take purchases home immediately, and pay them off over time. No interest is charged but high fees apply if you miss a payment – which one in five BNPL users do. BNPL isn’t covered by the same consumer credit laws as, say, credit cards. This is set to change, but right now, BNPL providers don’t have to make rigorous checks to be sure consumers can handle repayments. That matters because almost two-thirds of BNPL purchases are made by women. And this type of debt can quickly unravel your finances if you fall behind, as the late payment fees can be the equivalent of sky-high interest rates.

• Payday loans: NAB’s survey found both sexes are equally likely to use payday loans. The difference is that women typically owe twice as much ($1340 versus $648). The Consumer Action Law Centre says growing numbers of women, especially single mums, are turning to these rip-off loans. Payday loans are pitched at those who can least afford the ridiculously high loan fees. MoneySmart says that to pay back a $2000 payday loan over one year you’d need to repay a total of about $3360 – $1360 more than the amount borrowed. What’s worrying is that payday loans can lead to a debt spiral. Before you consider one, check out alternative solutions including Centrelink advance payments. Or, if you’re struggling with a household utility bill, contact the provider to set up a payment plan.

good debt

How to clear bad debt

Make paying down your debt your number one priority – even more than saving. There’s little point stashing money away in a savings account paying 5 per cent when chances are you’re paying between 10 per cent and 20 per cent interest on your bad debts.

Here’s an edited extract from my book, Ditch the Debt and Get Rich, on how to control bad debt.

Work on a strategy

When it comes to paying down multiple debts there are a couple of different approaches to take. The snowball method pays off debts in order, from smallest to largest, making the minimum repayments on the larger debts and putting extra cash into the smallest debt. 

After paying off the first debt you move onto the second smallest debt, continuing this way until everything’s paid off. The avalanche method requires you to pay off the debt with the highest interest rate first and then move down the list by interest rate until all your debt’s cleared. You make the minimum repayments on any debts with lower rates and pull all your surplus money towards the debt with the highest rate.

Zero & balance transfer

Zero transfer offers are commonplace these days. The idea is you pay no interest, in some case for up to 32 months, if you transfer your debt from a different institution. Other issues to consider include:

What does the rate revert to once the introductory period is over? Make sure it’s still competitive because if you don’t manage to pay it off in the promotional period you may find yourself in the same boat again.

What is the annual fee? A high fee could really eat into any interest savings you make.

Is there a balance transfer fee? Some institutions charge a percentage of the balance and this could really eat into any savings made. A 2 per cent fee on a $5000 balance adds up to $100.

good debt

To work out what balance transfer deal might be best for you, consider how large your balance is, how much you can afford to pay off each month and how likely you are to stick to this. If you have a large balance and your repayments are on the lower end then the revert rate will be very important. Other issues to consider are:

You might not be able to get a balance transfer through a financial institution you have the debt with. Balance transfer limits may apply which means the new lender may only allow you to transfer a portion of the total limit of the new card.

So if you are approved for a card with a $5000 limit but the provider has a cap of 80 per cent on balance transfers, it means you can only transfer up to $4000 of your existing debt onto the card. If your debt is higher than that you’ll end up with several debts again, which isn’t ideal. If you’re really serious about ditching debt make sure you don’t make any new purchases on the card.

Consolidate debt

Another option worth looking into is consolidating all your outstanding debts into a personal loan or home loan. The advantages of a personal loan is that you only have to worry about making a single repayment each month and at the end of the loan term the debt’s paid.

If you take this option, look for a personal loan with a competitive rate. Also take into account application and ongoing fees to make sure you’re getting a good deal.

If you have a mortgage, look into consolidating all your debt into your home loan. You’ll need enough equity in your home to be able to do this. Just be sure to increase your payments so that you don’t stretch what would have been a five-year personal loan into a 30-year term home loan.

Related stories