How you tackle your debts may make a big difference to what you pay in the long run.

It’s not uncommon in Australia to have some form of debt, whether that be credit card debt, a personal loan, student tuition, car finance or a home loan.

The good news is, certain debt can have its advantages and generally that will come down to three things, including whether that debt has the potential to make you money, if you have good-debt management skills, and are also prepared for unexpected events.

Below we explain the difference between good debt and bad debt and ways you could improve your debt-management skills.

What is good debt and bad debt?

While all debt costs money and needs to be repaid, not all debt is equal. There is ‘good debt’ and ‘bad debt’ and what separates the two is simply the ability for that debt to help you build wealth over time.

Debt could be viewed favourably if you’re using it to invest in an asset, such as property or shares, which may generate an income over time, and/or grow in value, so you can sell it for a profit at a later date.

Bad debt is money you borrow for things that won’t see you achieve a financial gain, such as day-to-day expenses, like groceries, in addition to things like clothes and holidays.

Ways to improve your debt-management skills

These skills are handy when it comes to managing money, saving, and planning ahead. The following strategies could help you pay off your debts sooner.

1. Work out your debts and what they total

A good starting point would be to make a list of how much you owe and to which providers, and how much you pay in fees and interest to each.

While this may surprise you, it will give you a clear view of exactly where you’re at, and how different interest rates and fees could affect the amount you pay back.

2. Compare what you earn, owe and spend

Apart from identifying exactly what you owe, it may also help to be across how much money you’ve got coming in, how much cash is required for the essentials and where the rest is going.

This will help you identify where there may be room for movement and where you could extract a little bit extra to add to your repayments.

3. Consolidate your loans into one

Multiple debts can mean multiple fees and interest charges, which is why consolidating your debts into a single loan, with a lower interest rate and lower fees, could help save you money.

Rolling your loans into one, could be easier to manage because you’ll potentially only need to make one repayment rather than having to juggle several.

However, before you make any decisions, you’ll want to look into whether your lender is licensed by ASIC and if you’ll really be saving money once you factor in interest rates, fees and any additional charges. If you don’t make your repayments on time, you may end up paying more.

4. Pay your debts on time

Time management and debt-management often go hand-in-hand, as paying things when they’re due can often help you to avoid late fees and added interest charges.

Consider setting up alerts to remind you when your payments are due or you might benefit from paying by direct debit.

Remember, late payments may also lead to black marks on your credit report which could affect your ability to borrow money, as it reveals to lenders whether you’ve been paying your bills on time.

5. Pay the full amount outstanding

When you’re making repayments, you typically get two options – to pay the full amount that you owe, or to pay the minimum amount owing.

It might be tempting to only pay the minimum amount owing, but you could still incur interest on the balance that’s leftover, which means you may end up owing more money. If you’re able to pay the full amount, typically you won’t be charged any interest at all.

6. Make extra repayments

Make extra repayments on top of your regular repayments. This could help you pay off what you owe at a faster rate and you’ll typically pay less interest, which could save you thousands of dollars, depending on how much you owe.

Before making extra repayments, check out the conditions of your loan, as there are some lenders that might charge you for paying off your debt early.

7. Shop around for a better deal

High interest rates and added fees can really affect how much you pay back, on top of the original amount you borrowed.

With that in mind, it might be worth shopping around – and there are comparison websites out there that could help do some of the legwork for you.

8. Have a back-up plan

Expecting the unexpected always goes a long way when it comes to your finances. Your lender could increase interest rates or change their repayment terms, or you might experience changes in employment or health, which could prevent you from making repayments.

By having a contingency plan, such as an emergency fund, you could potentially avoid missing repayments or accumulating more debt.

Contact us if you need help managing your finances.

©AWM Services Pty Ltd. First published April 2021

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