You can thank us later - reasons to stop thinking about debt.
Debt is all around. In fact, it’s hard to avoid. Debt for a car loan, home loan or wedding, financial products like a mortgage support us for major life events. Most of us probably have a hefty credit card debt too.
It costs money to borrow money, but don’t freak. There is good debt and bad debt. Personal loans, payday loans, mortgages, study assist; there are so many different financial products and services on the market. Credit cards are so common they’re even offered by supermarkets.
For most, living with debt is a part of life. We have a look at the types of debt and highlight some key information about dealing with debt.
Debt is money owed to another individual or institution. Most of us are in debt to a bank. We can borrow money to purchase a home, car or even to buy food, and pay the money back later. Most of the time interest is charged on the loan. Watch out: interest compounds. This means you can be charged interest on interest.
- Debt principal - The amount you actually borrowed.
- Interest - The fee for borrowing money. Usually charged as a percentage of the remaining balance. Interest is added to the principal loan repayments.
- Credit - Money available to be paid back at a later date.
There is good debt and there is bad debt.
- Good debt - Debt to own an asset that’s expected to appreciate in value, like a mortgage for a house.
- Bad debt - Debt that just costs you money, there’s nothing to gain. Credit card debt is a bad debt.
Spend money to make money
Using debt to invest can be a smart move. The equity in a property can fund the purchase of another home, for example. There are specific loans for investment purposes too, and not just for property. Share trading loans are offered by most major financial institutions.Back to top
There are many different credit products and services, but there are two different types of debt: secured and unsecured debt.
Unsecured debt is more expensive than secured debt. An unsecured credit product isn’t tied to an asset so you pay more to borrow money.
Credit cards, store cards & charge cards
These cards give you an unsecured line of credit to spend as you wish. Approval is based on the applicant’s credit history, age, residency and ability to service the minimum credit limit. Credit card, store card and charge card debt is bad debt. Interest rates can be as high as 20% on some products.
Credit cards, store cards and charge cards are usually the first thing people try to pay off when dealing with multiple debts. Balance transfers are a way to get a break on your card interest charges. Some products offer interest free terms for years.
Payday Loans are small unsecured loans made to help you cover issues with short term cash flow. You need to be working to get a payday loan — get cash to cover you until your next pay day. It may be easier to get a payday loan than a credit card or personal loan as payday loans have different application requirements to these products. This comes at the cost of much higher interest rates and fees.
If you’re struggling with payday loan debt, some debt consolidation loans cover payday loans.
Personal loans can be secured or unsecured. A secured personal loan can be a car loan or any loan where the borrower puts up an asset as collateral for the loan. Secured personal loans are generally much cheaper than an unsecured personal loan.
- Personal loans are offered by peer to peer lending services as well as most financial institutions.
- Personal loans can accrue interest at a fixed or variable rate of interest.
- Personal loans can be included in balance transfer to some credit cards.
Unsecured personal loans
Go on a holiday or use the money for day to day expenses, unsecured personal loans can be used for almost anything. Unsecured personal loans are more expensive than secured personal loans because the debt is not tied to an asset.
Secured personal loans
Most types of secured personal loans on the market use a car as a security. You can get a loan to buy a new car or get a loan based on the market value of a current vehicle. Assets like art or jewellery can also be used.
Car loans - Get a loan to buy a new car or motorbike from the bank. Dealership finance can be arranged directly from the car yard in some places. A car loan is a secured loan and has lower rates and fees; however, you run the risk of the asset being sold if you default on the loan repayments.
- Personal loan interest rates and debt consolidation loan rates are similar. Be sure to compare the rates if you’re considering consolidating personal loan debt to another loan.
A personal loan can be included in a balance transfer to credit card. There are only a few card providers that let you do this. Take advantage of extended interest free credit card balance transfer offers by transferring your personal loan debt to a new credit card. Personal loan debt can also be included with most debt consolidation loans.
These types of loans are tied to an asset. A mortgage is probably the most common type of secured loan debt in Australia. The lender has some security over the loan, so secured loans have lower interest rates and fees than types of unsecured debt.
Lines of credit
You can apply for a line of credit as a stand alone product, but mostly people get access to a line of credit when it’s linked with another account like a home loan. Home equity lines of credit have a rate somewhere around your home loan rate. This type of loan can be a good option for refinancing other higher interest rate debts.
A mortgage is the greatest single debt a person is likely to have, home loans can be in the millions. Interest charges can be significant on such a large debt. Home loan interest rates can be fixed or variable and you can refinance to another lender if you see a better deal. Even a small reduction in the home loan interest rate can mean a saving of ten of thousands over the life of the mortgage.
A home loan is a good debt. Make repayments and your share of the property increases. Eventually you’ll have 100% equity. You can then use the equity in the property to borrow more money.Back to top
Government and public debt
The two most common students loans are FEE-HELP and HECS-HELP. If you’re studying at an approved institution, you may be eligible for a FEE-HELP loan, HECS-HELP loans are available to everyone else. These types of loans help you pay for study and also offer discounts on the cost of tuition if you pay up front. You start to make repayments towards your student debt once your income reaches a certain level. The more you earn, the more you’re required to pay towards your student debt.
Interest charges - Student debt is tied to the Consumer Price Index (CPI). There is no actual interest rate charged to your student debt. Student debt is interest free — kind of. The debt will become more expensive as the government adjusts the CPI.
Earn more, pay more - The ‘repayment threshold’ is set by the federal government and is subject to change. For example, you can earn up to $54,126 before you have to start making repayments to your student debt. The financial year for 2014-2015, this figure was $53,345.
The Australian Tax Office (ATO) can hold part of any tax refund you’re eligible to get to offset your tax debt. You might have to sell non-essential assets to pay your tax debt. Investment properties, cars, boats and shares are all expected to be sold (or used as a security for another loan) to pay the ATO. If this isn’t an option, you can apply for a hardship provision. You may be released from part or all of your tax debt.
- Tax debt can be included as part of a Part IX Debt Agreement or Part X Personal Insolvency Agreement (PIA).
- If you’re a small business owner, you can also apply for an interest free payment plan.
- A General Interest Charge (GIC) is applied to all tax debt. You can view the GIC rates on the ATO website.
Are you struggling to deal with debt? Credit card balance transfers, payment plans and debt agreements all have different repercussions. In this section we have a look at the different options for dealing with debt.
- Creditor - The person or institution you owe money to.
- Debtor - The person who owes the debt.
Pages like the one you’re reading now can give you some key information on how to deal with a debt crisis. There are also services that offer free personal advice from a registered financial counsellor. For people in New South Wales, a free call to an institution like the Financial Rights Legal Centre can help you plan your next move. See the FAQs for information about the services to contact for free debt advice in your state and territory.
Start high or low?
Which debt to pay off first? Credit card, store card and charge card debts are often the most expensive type debt and the debts people try to pay off first. But it comes down to your personality type. Some people are able to keep their eye on the end picture; while other people need small wins to keep them on track paying down debt.
A budget helps you take control of your expenditure. You can see everything that’s coming in and going out. Penny pinching is necessary when you’re in the red, but budgeting is a sound practice when you’re debt free as well.
Credit card balance transfers
A credit card balance transfer is a great way to reduce your credit card interest repayments. Transfer your existing credit card debt to a new credit card when you apply, and you get a special interest rate for a limited period of time. At the end of the introductory period, the introductory rate reverts to a much higher and interest charges will increase.
- It can be difficult to transfer your entire credit card balance if you’ve maxed out your available credit. By taking the maximum credit limit available to you and maxing out the card, you’ll get a much lower credit limit next time you apply for a card.
- Don’t spend on the card as balance transfer balances void any interest free days on the credit card.
Debt consolidation loans
Combine your debts into a debt consolidation loan so you can lower your interest charges and benefit from one payment for all your debts. In some cases, the interest rate of a debt consolidation loan can be lower than credit card and personal loan interest rates, but not always. You will see the greatest benefit from a debt consolidation loan if you have a credit card balance charged at a high rate of interest as well as other loans.
- Be sure to compare the interest rate of your debt consolidation loan with the interest rates of your existing loans.
- Some credit card providers lets you transfer the balance of a personal loan to a credit card. Credit cards have some great interest free balance transfer deals.
A debt agreement is an authorisation to pay back your debts outside of the terms and conditions of the original contract. Debt agreements can be formal or informal. A formal debt agreement, while not an official declaration of bankruptcy, it’s still an act of bankruptcy, it will be recorded on your credit file. An informal debt agreement usually applies for debts under $5,000. Informal debt agreements can include payment plans, hardship provisions and dispute resolution services.
Informal debt agreement
An informal debt agreement is any agreement to pay back a debt in a way other than what’s stated in the t&c’s. It’s important that you talk to your creditors — the phone, gas or electricity company for example — and tell them you’re having trouble meeting your financial commitments.
Informal debt agreements may still be recorded on your credit file for a number of years.
Hardship provisions - Most major business that deal in credit have a hardship department that can help you meet your repayments to stop you defaulting on your contract. There are more business than you’d first think with hardship provisions for customers. Utility and telecommunications companies make allowances for their customers as well as banks and credit unions. A hardship officer may be able to help you pay back your debts in installments or you may get a repayment holiday to help you get back on your feet.
- Extended loan period - This means smaller repayments in the short term.
- Repayment holiday - Stop making repayments for a short period of time.
If you would like to apply for an informal debt agreement or other hardship provisions, speak to the lender’s customer service team to be put through to the right department.
Formal debt agreements
There are two types of formal debt agreement. Both debt agreements and Personal Insolvency Agreements (PIA) are administered under the Bankruptcy Act. Although these formal agreements are different to a declaration of bankruptcy, a PIA or debt agreement is recorded on your credit file for a number of years and your name is permanently recorded on the national personal insolvency index (NPII).
- Part IX Debt Agreement - An agreement between the borrower and the creditor(s) to pay back all the debt in installments the borrower can afford over a period of time. To be eligible for a part IX debt agreement, you need to meet the income, asset and debt requirements set out by the Australian Financial Securities Association (AFSA).
- Personal Insolvency Agreement (PIA) - A PIA is similar to a part IX debt agreement. Eligibility requirements are the main difference between the two, there are no income or asset limits needed to apply.
Watch out for
Entering into a debt agreement or a personal insolvency agreement is an act of bankruptcy and has serious consequences.
- Debt agreements and PIAs are recorded on your credit file for a number of years.
- Your name is permanently listed on the NPII.
- Debt agreements and bankruptcy can prevent you from working in certain regulated professions.
Bankruptcy is a last resort for dealing with unmanageable debt. You are released from paying unsecured debt. Secured debts like property can be sold by the bankruptcy administrator. This is the person assigned to your estate to control and sell assets to repay your debts.
- Bankruptcy stays on your credit file for a period of five years from the bankruptcy notice was issued or two years from when the bankruptcy is discharged, whichever is later.
- Bankruptcy generally lasts for a minimum three years before discharge is allowed.
Early release of superannuation
Your superannuation fund is your retirement savings. You can’t access your super until you reach the preservation age (currently 55); however, you may be able to get an early release of your superannuation if you’re experiencing financial hardship. Applying to get your super early to pay your debts can be a way to avoid bankruptcy.
- Compassionate grounds - Common reasons can include to pay for medical expenses, to keep your house or to pay for funeral expenses.
- Financial hardship - Common reasons can include to pay for your family’s living expenses like food, medical expenses, loan repayments and overdue rent.
Get your super released early to pay your mortgage
You can apply to get your superannuation early to pay your mortgage if you are in a position where you’ve defaulted on your load and the lender wants to sell the property. This is a good options for people who have a sum of money large enough to cover the entire cost or a significant part of the home loan. If your name is on the mortgage documents and you live in the property as your principle place of residence, you can apply to get your super released early to pay your mortgage debt. You can lodge an application with the Department of Human Services (DHS) to get your super released early.
- Getting your super early gives you the ability to pay your debts without entering into more debt or a new agreement with creditors.
- You’re taking money out of your retirement savings.
- Increased tax rate on money withdrawn from a superannuation fund prior to retirement.
If you’re in debt, you may have had an encounter with a debt collector or a debt collection agency. A debt collector can be from the creditor, or you can be contacted by an independent debt collection agency.
There are rules about when, where and how often a debt collector can contact you. For example debt collectors are allows to make up to ten phone calls a month. You can only be contacted for a ‘reasonable purpose’, which means an issue related to the debt.
Bad credit is what you get if you default on a debt. It’s a default listing on your credit file. Your credit file is a record of your financial history. If you apply for a loan, a limit increase or default on loan repayments, this information is recorded on your credit file. Different debts are listed on your credit file for different periods of time. For example, an act of bankruptcy will stay on your credit file for the longest number of years before the listing is removed. You can view the type of debt and the length of time the debt is recorded on your credit file in the table below.
|Default type||Stays on credit file for|
|Debt Agreement||5 years from the time the debt agreement started or 2 years from when the agreement is terminated or declared void.|
|Personal Insolvency Agreement||5 years from the time the PIA started or 2 years from when it’s terminated.|
|Court Judgements||5 years from the time of the court decision.|
|Consumer credit payments||5 years from the time the creditor gets in touch with the Credit Reporting Body (CRB).|
|Informal debt agreement - any agreement to pay back a loan outside of the terms of the original contract.||An informal arrangement with a creditor to pay back a debt can stay on your credit file for up to five years.|
|Bankruptcy||5 years from when you were declared bankrupt or 2 years from the date the bankruptcy is discharged — whichever is later.|
Here are some key tips if you’re stuck in a debt crisis.
- Budget - Look at your income and your expenses and make a plan to pay back your debts.
- Plan - Once you’ve got an idea of how much you can afford to repay, have a plan about the order you want to pay off your debts. This all depends on how many and the type of debts you have, but you should aim to prioritise secured debt over unsecured debt. Looking at unsecured debt like credit card debt, you have two options. The option that is right for you depends on your personality. Are the type of person who needs little wins on the path to your end goal? Then paying off the cards with the smallest balance first is a good way to keep to your goals. Alternatively, paying off the card with the highest interest rates first can save you money in interest repayments over time. Unsecured debts can be included in a debt agreement too.
- Get help - A google search will give you a local financial counselling service to contact. If you’re in NSW, make a free call to the debt hotline on 1800 007 007 Monday to Friday, 9.30am to 4.30pm. You can get free advice on debt, credit and banking issues over the phone if you and experiencing issues with debt.
- Speak to the creditor - Double check that it is actually you who is response for the debt. If it is, arrange a payment plan based on what you can afford to repay.
- Keep records! - Be sure to keep copies of letters and notes about conversations you have with creditors. This information can be crucial later on.
If there’s something we haven’t covered, or you have a question, let us know by using the form below the FAQs.
Who do I call for free advice about debt?
There are a number of services that offer free legal advice about debt. community legal centres, legal aid services and registered credit legal services all offer free over the phone advice about the best way to manage your debt situation. The yellow pages or a quick google search will list the contact numbers for the services mentioned above for your state. Some popular credit advisory services include:
- NSW - Financial Rights Legal Centre: 1800 007 007
- ACT - Consumer Law Centre: 02 6257 1788
- QLD - Caxton Legal Centre: 07 3214 6333
- VIC - Consumer Law Action Centre: 01300 881 020 or 03 9629 630
- WA - Consumer Credit Legal Service 08 9221 7066
What is a credit file?
Your credit file is a record of your financial history. All applications for credit — mobile phones, home loans and credit cards for example — are recorded here. Your credit file also shows the type of loan you’ve applied for, how much credit you were given and whether you’ve missed a payment.
There are a couple of credit reporting agencies, Veda and Dun and Bradstreet are among two of the biggest in Australia. These companies keep information on you for when you next apply for a loan. The company giving you a loan will look at your credit file to see whether you’re a worthy candidate for the product. If you default on a loan, this information is recorded on your credit file too. While you have a default listing on your credit file, you may not be able to get approved for more credit. After a number of years, default listings are removed from your credit file.
What’s the difference between a secured and unsecured debt?
There are two types of loans. Loans that are secured to an asset or unsecured loans, loans that are not tied to an asset.
Typically, a secured loan is granted for the sole purpose of purchasing a particular asset. Lending institutions will offer a loan secured to:
- a house (home loan),
- a motor vehicle (car loan),
- and in some cases art and jewellery.
The lender can sell the house or car if you can’t make repayments on the loan. This is why secured loans are far cheaper than unsecured loans. Car loans are the most common type of secured personal loan on the market.
Unsecured loans are not tied to any particular asset. The lender has your word as your guarantee that you’ll repay the loan. This is why unsecured loans have strict credit rating and income requirements. Credit cards and personal loans require all applicants have no default listings on their credit file in addition to high minimum income requirements.
How can I dispute a debt?
Make a claim with the ombudsman for problems with debt. You can dispute the amount of debt or the fact that the debt is actually yours. Debt collectors are required to stay away until the claim is finished and you can not be taken to court while you have a debt issue lodged with the ombudsman service.
The FInancial Ombudsman, Credit and Investment Ombudsman and the Telecommunications Industry Ombudsman Service are the main debt dispute services available to Australians. The Financial Ombudsman Service (FOS) covers most type of consumer debt. If you have a complaint about banking, credit, loans, debt collection, insurance, stock broking, finance and mortgage broking, you should speak to the FOS. The FOS can help with disputes over debts up to half a million. It’s free to lodge a dispute.
What do I do if it’s not my debt?
If you’re contacted by a creditor about a debt, but you don’t think it’s actually your debt, it can be something as simple as showing your driver’s licence to sort the situation. However, you may be the victim of identity fraud. Get a free copy of your credit file and contact the creditor(s) to confirm the transactions and balance owing if you think you’re being forced to pay someone else’s debt.
Card payments, like credit card and debit card transactions are also covered by the card scheme. For example, the MasterCard Zero Liability Guarantee gives you a full reimbursement if you’re the victim of credit card fraud.
I didn’t think I owed that much?
If you dispute the amount you actually owe rather than the debt itself, you have the right to ask for an itemised statement showing:
- the amount,
- how the debt was calculated, and
- details of payments and details of charges.
If you find that the information is inconsistent with your own transaction records, you can take the matter to a dispute resolution service to have the debt reviewed.
Important! Remember to always keep records of conversations you have with call centre staff, emails, payments and all letters.
How do I manage multiple debts?
There are a few ways of managing multiple debts. Speak to a financial counsellor for personal advice about the best way to deal with multiple debts.
Move multiple debts to the one loan and one repayment when you take out a debt consolidation loan. You may also be able to benefit from a lower rate when you move your debts.
There are a few ways to approach debt consolidation. For example, people refinance credit card, personal loan or car loan debt to their mortgage. People can also refinance credit card debt and personal loan debt to a credit card through a balance transfer. The other option is consolidate multiple debts to a debt consolidation loan. A debt help company can assist you with planning a debt consolidation strategy or you can speak to a financial counsellor for free financial advice.
Debt consolidation loan
- What debts can I include in a debt consolidation loan? You can refinance the balance of a car loan, personal loan, credit card, store card, charge card and other small debts using a debt consolidation loan.
- How much money can I borrow? You can compare debt consolidation personal loans here. These types of loans generally offer maximum loan amounts of $40,000 or $50,000. Loan terms can be up to 5 - 7 years.
Credit card balance transfer
A credit card balance transfer is a handy way to reduce interest charges. Move your existing debt to a new account and get a special interest rate for a set period.
- Balance transfer personal loan debt - You can use a credit card balance transfer facility to transfer the balance of a personal loan and credit card, store card and charge card debt. There are only a few providers that let you do this though. Read more about consolidating personal loan debt to a credit card here.
- Can I balance transfer to my partner? Some providers do allow you to transfer your partner’s credit card debt to a card in your name under a balance transfer. Check this page to find out which credit card providers do and don’t allow this.
Debt help company
Debt solution companies charge a fee for giving you tailored advice on the best way to manage unmanage levels of debt. These types of companies can help you negotiate payment plans with creditors and consolidate different debts into one loan. Some companies may even be able to help you remove negative listings from your credit file as well. A credit repair company investigates all the listings on your credit file to make sure the proper process was followed when the default was originally recorded.
Fox Symes Debt Consolidation Solutions are one debt help company that can work with you if you’re in a debt crisis.
Can I refinance my mortgage to pay my debts?
An option to deal with multiple types of debt is to refinance the debt to your mortgage. This process involves taking out an overdraft or a new loan tied to your existing mortgage and using the money to pay the balance of the other debts. The idea is that you can borrow money at your home loan interest rate to pay higher interest rate debts like credit card and personal loans.
If you are using money from your home loan account to pay other debts, be sure you know the effects of interest charges of paying off even a small debt over the long term.
Why is the debt collector trying to contact me? I paid my debt.
This is why it’s very important to keep records of all conversations and transactions. If a debt collector contacts you about a debt you’ve already paid, which can sometimes happen, let the debt collection agency know about the change in circumstances and provide copies of the transaction. You also have the option of taking the issue to a dispute resolution service if you feel your rights have been violated by a debt collection agency.
What if my debt is a result of fraud?
If you’re in debt because you’re the victim of fraud, don’t worry, the bank will work with you to recover the loss. Usually if you haven’t contributed to the loss and you let the bank know about the fraud right away, you get 100% of your money back.