We know Australia has astronomical levels of household debt. But some kinds of debt are “better” or more economical than others. Let’s explore some savvy tips to get your life – and financial stress levels – back on track.
What is considered ‘good’ and ‘bad’ debt?
Good debt usually describes something that you’ve financed through a loan that should provide a return on your investment.
This can mean anything from a mortgage to a home equity loan that helps you to renovate your property (giving you a bigger return if/when you sell or rent). Also, your HECS/HELP debt may be seen as ‘good’ debt, as little interest is charged and is always paid from your pre-tax income (so you can’t miss repayments!).
Bad debt means debt that doesn’t help you earn a return on your investment, or simply something that you might struggle to repay.
Think about it – maxing out your credit card can put you in a world of hurt if you struggle to pay off your balance. However, owning a home is considered the Great Australian Dream. These are both debts that you owe, but the former is seen as a sign of mismanaging your budget, and the latter means you’ve got a foot on the property ladder and are financially stable.
So, what can you do if you’re juggling one or multiple ‘bad’ debts? The good news is that there are options available to make life, and your budget, a little easier.
How you can repay your ‘bad’ debts?
We’ve all been there. Whether you’ve just had to get through the holiday season via your credit card, or you’ve taken out a loan for big ticket items, such as a wedding or family holiday, growing ‘bad’ debt can – and will – happen.
In fact, the latest research shows that personal credit card debt is back on the rise in Australia, reaching $16.89 billion, according to the Reserve Bank of Australia. So, it’s clear that some households have been struggling to clear their credit card balances in the face of cost of living and mortgage repayment pressures.
Let’s talk about actual solutions. Luckily, there are a few things to consider if credit card debts and other “bad debts” have been weighing you down.
Debt consolidation personal loan
This personal loan is designed to help you knock out one or more debts in one go. If you have multiple debts, like a car loan and an overdue credit card balance, a debt consolidation loan will combine all of these into an easier-to-repay loan.
The good news is you’ll only have one regular repayment to make, and one interest rate being charged. It’s bad debt simplified. You’ll need to budget to ensure you can meet your new loan repayments, and you’ll have to meet the lender’s criteria, but the idea is that having one set of repayments may offer some relief to your household budget. Especially as the personal loan interest rate is usually much lower than the average credit card interest rate.
But of course there are other options too.
Balance transfer credit cards
If your debt is reserved strictly for credit cards, you may want to consider a balance transfer offer. Balance transfer credit cards allow you to transfer your outstanding balances to a new card charging 0% interest for a set period.
Put simply, you move your debt to a new credit card that doesn’t charge interest right away, giving you some much-needed breathing room to pay off your balance.
Some cards offer these interest-free periods for up to two years, meaning you’ll have ample time to make a budget to pay off your debt for good. Keep in mind that any new purchases you make with a balance transfer card will be charged interest – typically at a pretty high rate.
It’s worthwhile locking your balance transfer card in a drawer so you’re not tempted to use it while you pay off your debt.
Pay more than the minimum
Just because your credit card allows you to make minimum repayments, doesn’t mean you should.
In fact, if you have a $10,000 credit card balance at a rate of 18%, if you only made minimum repayments it would take you 43 years and 11 months to pay it off. And who has the time, money or effort for that?
Instead, by making higher monthly repayments of $492 each month, this debt could be knocked out in just over two years. Plus, you’d save almost $25,000 in interest charges – money better kept in your pocket and not in the banks’.
If you have any room in your budget to do this, it may be worth making higher repayments to pay off your card balance for good. And you can always make more room by ditching UberEats and Afterpay splurges for a little while.
What paying off bad debt means for your credit score
If you can get on top of your debts, not only will you shake that weight off your shoulders, but it’s likely to boost your credit score too.
Banks and lenders inform credit reporting bureaus of positive information, such as paying off your car loan or outstanding credit card balance. This should reflect well on your credit history and may help to increase your credit score.
Having a good credit score can mean the difference between being approved or rejected for things like a home loan or even a new credit card. It’s in your best interest in more ways than one to pay off your debts.
To get a free copy of your credit scores today to see how your bad debt is impacting your credit history, use RateCity’s Credit Score App.
WATCH: 5 money tips from a financial coach