Debt is the darker side of earning and spending money, eating into our pay and our savings for months or years on end. But the older you get, the easier it is to see the practical reasons why so many of us use a credit card or borrow money for a car, house, overseas trip or basically any other major expense. So even if you’ve avoided some forms of debt, chances are that you’ll have others lurking in the shadows of your financial history. Instead of letting these debts gnaw away at your money, you can use this guide to take control of them. Got a serious debt from credit cards or a car loan? Find out the steps you can take to deal with it. Worrying about your HECS debt or student loans? We’ve got your back. You can even find tips on managing a mortgage and other personal loans so that these balances don’t weigh down the rest of your finances.
Guide: How to manage your debt
Time to read: 15 minutes
How to manage your credit card debt
You’re not alone if you have credit card debt. As of January 2017, the average credit card balance in Australia is $3,083 and around 63% of that debt is accruing interest. With credit card rates among the highest of any interest-bearing products, it’s important to get on top of your balance (or balances) ASAP. Here’s what to do:
1. Make regular repayments
Around once a month you’ll get a new statement from your credit card. Check the due date and make sure you transfer at least the minimum amount listed before this date. Usually you’ll have to pay at least 2–3% of your balance to meet this requirement, which is shown as a dollar figure. So if you had a $5,000 debt on your card, your statement would show a minimum repayment amount of $100–$150.
But because interest is calculated based on your daily balance, you can actually reduce the amount of interest that’s charged each month by making more regular repayments. This could be ideal if you get paid weekly or fortnightly, because you can just flick money across from your bank account every time your wages go in.
How much can you save by changing payment frequency?
Let’s say your credit card debt is $5,000 and your minimum repayment amount is 2% or around $100 per month. If your card’s interest rate was 18%, here’s the different interest charges you’d get depending on if you made monthly, fortnightly or weekly payments:
- Monthly payments of $100: $45.86 in interest per month
- Fortnightly payments of $50: $44.83 in interest per month
- Weekly payments of $25: $44.64 in interest per month
When compared to monthly payments, you can save around 3.3% by making payments every fortnight and 3.6% by making weekly payments. The more you pay overall, the greater the savings.
2. Pay more than the minimum
It would take years to pay off your credit card if you only transferred the 2–3% minimum for each statement period. Say you had a card with a $5,000 debt and an 18% interest rate. If you paid a minimum of 2% each month, it would take 33 years to clear the balance and cost a total of $17,181 – more than three times as much as the original balance.
But if you paid $300 per month, your credit card debt would be cleared in 1 year and 7 months and cost a total of $5,698. That’s a saving of $11,483 and 31 years and 5 months.
3. Conduct a 0% balance transfer
If you want to pay off your credit card as quickly as possible, you could consider moving the debt to a card that offers 0% interest during the introductory period. Known as balance transfer credit cards, these options give you a window of time to make repayments without accruing extra interest on your balance.
At the end of the balance transfer promotion, the 0% interest rate reverts to a higher standard rate. So ideally, you want to be able to clear your debt before that happens. Say you’re paying $300 a month towards your card debt of $5,000. If you transferred this balance to a card offering 0% for 18 months, you’d be able to pay it off without any extra interest charges.
How to repay your car loan
Whether it’s your first set of wheels or a shiny new upgrade, a car loan is a popular way to finance the purchase. But as vehicles lose value as we use them, in a few years you could find yourself stuck making payments on a car that’s not worth it anymore. So here’s what you can do about it.
1. Make additional repayments
Depending on the type of car loan you have, you might be able to make additional or lump sum repayments to help pay it off faster. This option can be great if you get a windfall of money or a raise at work and have more cash to put towards your debt.
Say you got a car loan for $30,000 with an 8.76% interest rate. On a 5-year loan term, you’d be making regular monthly payments of $620 and pay a total of $7,145 in interest over the life of the loan. But if you were able to increase your monthly payment to $800, it would take 3 years and 8 months to pay off the loan and save you $1,964 in interest.
Find out what restrictions your car loan has
Lenders may place limits on additional and lump sum payments, especially for fixed-rate car loans. These loans often have early termination fees that could cost hundreds of dollars.Read our guide on paying off car loans early to find out which loans offer this option.
2. Check if you’re paying for extras
Some car loans provide loan insurance and other extras that could attract additional fees and charges. If these features are voluntary, you could be able to save money on your loan by opting-out of them.
If you’re in the market for a car loan now and looking to save costs, make sure you compare features and fees that will jack up the cost even when the interest rate seems low. To put this in perspective, paying just $20 per month in administrative fees would cost you $1,200 on a 5-year loan.
3. Consider refinancing your car loan
If your current car loan is costing you too much, it’s possible to switch to a loan from a different lender. This can help you save on interest and additional fees, offer more flexibility with repayments and provide additional features. Refinancing may also be a useful option if you want to upgrade your car but are still paying off the old one.
On the flipside, refinancing could lead to exit costs from your old loan, and setup costs for the new one. But if you’re serious about paying off your car loan, it’s worth comparing options to see if refinancing will help you save money and reach your goal faster.
How to cut down your student debt
If you’re at uni or a private college, there are lots of financial factors that can lead to debt. From HECS-HELP loans to credit cards, personal loans and car loans for students, here’s what you need to know to manage student debt.
Unless you opt to pay your course fees upfront, you’ll be taking out a HECS-HELP loan when you go to uni or another approved tertiary institution. The HELP loan scheme covers a wide range of government loans available for study and, by the end of your course, could be worth tens of thousands of dollars.
Unlike other loans, HELP debts don’t have actual interest rates. Instead, the amount you owe is adjusted each year to reflect changes in the Consumer Price Index. You also have two different ways you can pay off this debt:
- Compulsory repayments. These are based on your taxable income and vary according to the Australian Taxation Office’s repayment threshold, which is adjusted every financial year. When you get a job, the tax form you fill out for your employer has a section asking if you have a HECS-HELP debt. As long as you tick “YES”, any compulsory repayments will be calculated and taken out before you get paid. If you’re self-employed, you will receive details of your compulsory repayment requirements after submitting your tax returns.
- Voluntary repayments. You can pay off your HELP debt sooner by making additional, voluntary repayments at any time via BPAY, credit card, phone or your MyGov account. Voluntary payments are not tax deductible, but could reduce your compulsory repayment amount if you make the payment before filing your tax return.
Voluntary HECS-HELP payments
As of 1 January 2017, there is no bonus available if you make a voluntary payment on your HECS-HELP debt.
Student credit cards
Getting a credit card when you’re a student can help you pay for textbooks, housing and trips overseas. Many of these cards also waive fees for qualifying students. But when left unchecked, credit cards can have a serious impact on the debt you accumulate while studying. If you do decide to get a card, using the following tips will help you manage it responsibly:
- Compare cards and choose one with low rates and fees.
- Always budget for your repayments.
- Aim to pay off the full amount by the due date on your statement.
- Only use it when you know you can afford to pay it off by the due date.
Find out how to avoid student credit card debt now
Student car loans and personal loans
As well as HECS and credit cards, students can apply for personal loans and car loans that often have lower fees than those available to people who aren’t studying. While this can help you save when compared to regular products, it’s important to remember that these loans will still mean you’re taking on debt.
These loans work in similar ways to regular loans, so the same debt management strategies apply. If you’ve never had a loan before, here are the key details to help you make it work for you:
- Compare your options before you apply to find a loan that suits your circumstances and needs.
- Check for fees and budget accordingly.
- Always make repayments before the due date to avoid penalties and extra fees.
- See if you can make additional payments.
- Contact your loan provider with any questions – it’s their job to help you.
What about student loans and credit cards for non-residents?
If you’re an international student in Australia, you may still be able to get a line of credit as a temporary resident. You may need to have a set amount of funds available in an Australian bank account before you can apply for this type of loan or credit card, so be sure to check with individual providers before starting an application.
When you get a line of credit in Australia, you will also establish credit history here. If you manage the loan well by making repayments on time, this can work in your favour for future loans. But if you miss payments or don’t pay the amount that’s required by the due date, it will leave a black mark on your Australian credit file. Review the tips above for students and always budget for loan repayments so you can enjoy your time in Australia without adding financial burdens to your baggage.
How to manage your mortgage
While the dream of owning a home or a slew of investment properties is very appealing, mortgage repayments can quickly bring us back down to earth. Still, your grand designs for property can become a reality and stay affordable with the following tips.
Pay the principal and interest rate
This type of repayment – sometimes referred to as “P&I” – covers the cost of both the principal amount you borrow and the interest charges. P&I repayments are more expensive than interest-only repayments, but help save you money in the long run.
As an example, say you wanted a $500,000 home loan on a 30-year term, with an interest rate of 5.50% p.a. If you chose interest-only payments, your monthly cost would be $2,291.67 and you’d pay a total of $825,000 in interest over the life of the loan.
In comparison, your principal and interest repayments would be $2,838.95 per month and you’d pay a total of $522,020.20 over the life of the loan. With this option, your total savings on interest charges would be $302,979.80 over the 30-year term, or around $10,099 per year.
Use our calculator to work out your home loan repayments
Change your payment frequency
Like many other loans (and credit cards), interest on your mortgage is calculated daily and paid monthly. This means you could be able to save some money on interest charges by choosing to pay in fortnightly or weekly instalments. Just make sure you check with your provider, as some home loans place restrictions or vary terms based on your payment frequency.
Get an offset account
With this type of account, the amount of money you deposit into it is used to offset what you owe on your home loan. So if you had a $500,000 home loan and put $10,000 in an offset account, you would only pay interest on $490,000 of the home loan amount.
Offset accounts are a great way to reduce what you pay on your mortgage while growing your savings. The longer you keep money in the offset account, the greater the potential savings on your mortgage.
Offset account hack
Want to take your offset account mortgage savings to the next level? Keep your salary in your offset account on a monthly basis and use your credit card to pay for things. When your credit card payment is due, transfer the money from your offset account and pay it off in full. This gives you a way to make interest-free purchases while maximising your mortgage savings. Find out more with our guide.
Pay more than required
If your loan allows it, you could be able to save a small fortune by paying extra on the monthly amount. There’s a few different ways you could do this:
- Lump sums. If you get a windfall of money, you could put a chunk of it towards your home loan to shave off some of what you owe.
- Higher repayments. If you can afford to pay more than what’s required for the month, setting yourself a goal that’s achievable on an ongoing basis will help reduce the cost in the long run.
With this strategy, even a small amount can have a big difference over the long term. Just remember to check the terms and conditions of your loan to make sure extra payments won’t attract additional fees or variations.
Learn about different mortgage overpayment options here
Paying off a personal loan
Personal loans are used for everything from financing a holiday to paying for big-ticket items or consolidating debt, so there’s a good chance you’ll get one at some stage in your adult life. Depending on the type of loan you get, you could consider some of the following strategies to keep your debt in hand.
- Make additional payments. This is usually available on variable rate and/or unsecured personal loans, allowing you to save money on interest and pay off your debt faster.
- Vary the loan term. Personal loans usually offer payment plans that range from 1–5 or more years. You’ll pay less each month with a longer term, but more over the life of the loan, so opt for the shortest loan term you can afford to help keep costs down. And if your circumstances change, you can always contact your issuer to request a longer or shorter loan term.
- Set up automatic payments. Personal loan repayments are usually the same each month, which makes them easy to budget for. To simplify repayments even more, you could look at setting up automatic direct transfers to your personal loan so that you don’t have to do it manually every month.
- Move the remaining debt to a 0% credit card. If you have a small balance on your personal loan, you could be able to save money by moving it to a credit card that offers 0% interest on balance transfers for a promotional period. Only a few credit cards allow transfers from personal loans, so before you apply make sure you compare your options and consider whether you’ll be able to pay off the balance during the promotional period.
What if I can’t manage my debts?
If you’re seriously struggling with some or all of your debts, try to stay calm and follow these steps.
- Contact your provider/s and let them know your situation. They will be able to help you find a solution that works for everyone.
- Call the National Debt Hotline. Call 1800 007 007 (minimum opening hours are 9.30am – 4.30pm Monday to Friday) to talk to a financial counsellor from anywhere in Australia. This number will automatically switch through to the service in the state or territory closest to you.
Along with wages, bills and taxes, debts are a major part of adult life. But with these tools at hand, you should be able to get on top of the money you owe and pay off your balances in a way that’s affordable for you.