If you feel like you are sinking deeper into bad debt, the first thing you probably need to do is stop spending on credit.   

If taking the scissors to your credit card is too final for you just yet, then at least remove it from your wallet, put it in a cup of water and freeze it. That way, it is not easily accessible and will save you from temptation.

Credit card use is actually growing at its slowest pace in more than a year but the average credit card balance in December 2010 was still $3314.   

If you feel you have a big problem, are being chased by creditors or are considering a debt agreement, then you need to seek help from a financial counselling service through various agencies, which range from Relationships Australia to Lifeline.


Most Australians are spending beyond their means.   

Everyone has probably heard of the terms good debt, which is tax-deductible debt for investing, and bad debt, non-deductible and usually with the highest interest rate. This is typically a credit card debt or store credit and where all your spare cash flow needs to be directed.

AMP financial planner Tony Rigby says there are three different types of debt bad debt, necessary debt and good debt and they should be paid off in that order.

Necessary debt is a home loan, while good debt is tax-deductible and includes loans for income-producing investments such as real estate or shares, he says.

Pay off bad debt such as credit cards first, as they usually have the highest interest rates. If left to spiral out of control, they can cost a person thousands of dollars in interest over many years.

Once bad debts are under control, a person can proceed to target other debts such as car and home loans, saving even more in interest.

Police Credit Union's executive manager of product and marketing, Paul Modra, says the sad fact is debt can overtake many people's lives and cause despair and unmanageable stress.   

Mr Modra says with credit cards drawn to their limit, personal loan repayments plus living expenses, debt can put pressure on relationships and your sense of wellbeing.

"Parting with cash is visible but the impact of using a credit card is not as obvious until the statement arrives, which consumers need to constantly have in mind if they want to get on top of their debt."

CONSOLIDATE DEBTS

If you have several cards maxed out, consider rolling all the debt in to one low interest-bearing card or loan to save interest.

Once you have done that, remember you still need to make more than the minimum payments each month to make any inroads.

Mr Modra says consolidating debts only works if the new loan makes your monthly repayments lower than your existing debt.

"One loan may also help you to be disciplined about making regular, affordable repayments," he says."Consolidation doesn't work for everyone.

"Be certain that the repayments of the debt consolidation loan are manageable and be prepared to cut up your credit cards."

Mr Rigby says once your credit cards are under control, the next type of debt you should target is car loans or any personal loans.

As with credit cards, you can reduce your interest costs on these types of loans by making extra payments.

"Car loans can have an interest rate as high as 12 per cent, while personal loans usually have an interest rate of around 14 per cent as they're unsecured. Making extra payments is not always advised for fixed rate loans, as penalties may apply," he says.

NECESSARY DEBT

Mr Rigby says as the interest rates on home loans are much lower than other loans, this type of debt should only be targeted more aggressively after your credit card.

"The most effective way to save interest on your home loan is to make extra repayments each month. Making payments fortnightly instead of monthly can also reduce interest," he says.

By increasing your repayment just $200 to $2368 a month on a $300,000 loan, with a 7.25 per cent interest rate, you'll save about $80,600 in interest and have your loan paid off in 20 years instead of 25 years.

Graham Couper-Smith, author of Pay Off Your Mortgage Fast and principal consultant at Manage Your Finance, says getting rid of your home loan altogether requires discipline and a plan.

"Getting rid of your home loan in just a few years gives you your life back, in terms of the choices you have," he says.

"There is no free lunch, a serious effort is required but for most people, getting rid of the home loan within five years is a realistic goal."

DEBT AGREEMENTS

Prushka Fast Debt Recovery chief executive Roger Mendelson warns consumers to avoid advertisements for "debt agreements" by businesses claiming to help you get rid of your debts.

"Now is always the tightest time for budgets, coming on top of the Christmas credit card blow-out and the usually un-budgeted back-to-school expenses, followed by rates notices," he says.

The debt crises is a government failure in abrogating its legal responsibilities to protect Australias financial interests.  Blame the government and an engineered credit crises.

Its time to reign in the activities of the banks.

Also what ever happened to responsible lending habits?.  Would you like  to increase your credit limit?.  Go on Mr Smith, you can do it have another $1000.  Then again no Mr Smith, why not have another $2000. 

It should be a two way street.  Responsible financial management.  Also responsible lending habits.   

I don't have a credit-card.

I don't WANT one, either.

Never have.

And it's STILL a struggle to make ends meet.

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What unemployed people should do is get as many credit cards as they are offered and buy all of the stuff that they could not normally afford to buy and then enjoy it until the sheriffs come around and get it back off them. That's what you call responsible lending. Buy now, never ever pay later LOL

Sir lastnail wrote on Mar 16^th, 2011 at 2:32pm:


Oh look at the river rising, it must be nail crying again.

Sir lastnail wrote on Mar 16^th, 2011 at 2:49pm:

While the international businessman nail lives in a rented house, with a rented premises and makes 1/2 of jack all but it doesnt matter because he has no one to leave it too anyway.