Drowning in Debt? Grab a life-line

With interest rates on the rise and a mortgage rate hike looking likely in the future, is it time you considered consolidating your debt?

A balance transfer can be a great option if you can make it work to your advantage.

Remember though, this zero interest honeymoon period is only for a limited time.

According to a finder.com.au survey there are 16,580,989 credit cards in Australia with 70.19 per cent of Australian adults having a credit card debt. For many Australians, managing credit card debt is a part of daily life. Whilst for most of us managing our debt is controllable, for some of us our day-to-day spending has gotten out of hand. If you add to this rising interest rates, an increased cost of living, car loans, home loans and an additional credit card the result could well be a debt spiral which carries a heavy burden.

If this sounds like you, small business and personal finance expert David Koch suggests it could be time to consider consolidating your debt.

“This means bringing it all together onto the lowest possible rate and setting up a payment plan to wipe the slate clean,” explains Koch.

Koch says there is no one size fits all approach to consolidating your debt. Instead he suggests doing your homework before deciding which route to pursue.

“But, just like you should have spent some time researching that credit card or home loan before signing on the dotted line, you need to do some research to consider which type of debt consolidation is right for you too.”

Let’s explore the options:

Combine your debt into a personal loan

One of the significant benefits to a personal loan versus a credit card debt is the difference in interest payments. Personal loans attract far lower interest rates than a credit card, usually ranging anything from 7-14 per cent. This is oftentimes far less than the interest rate you have on your current credit cards. If you consolidate your credit card debt into a single personal loan you will not only pay off the debt within a fixed term you will pay less interest to boot.

Transfer your balance

You’ve all seen the ads, transfer your balance and pay zero interest for twelve months. A balance transfer can be a great option if you can make it work to your advantage. The key is to take advantage of the interest free period to pay off your debt within the twelve months. Ideally a zero per cent balance transfer card will also offer a low interest rate on new purchases too, however your focus should be on curbing any extra spending and paying off your existing debt instead. Remember though, this zero interest honeymoon period is only for a limited time and once the interest free period ends the balance with will revert to the regular interest rate. And here’s the stinger – these cards often have a higher interest rate. So only take this route if you can be certain to pay it off within the interest free time frame. 

Roll your debt into your home loan

“If you have a home loan and have accrued a bit of equity in the property, this approach can be a great way to save on interest,” says Koch. “But, just like with credit card balance transfers, you need to have the discipline to increase mortgage repayments to clear the extra debt as quickly as possible.”

However Koch suggests this type of debt consolidation comes with a caveat as it turns your unsecured debt into a secured debt which means if you fail to make your payments the bank could force you to sell your house to pay off the loan!

Whatever approach you decide to take, if you are considering consolidating your debt it pays to do a budget first to ensure you have a real handle on where and how you are spending your money. Make sure your new plan allows for you to make the payments you need to meet your new terms as the main aim is to get out of debt sooner rather than later.