Bad debt and very bad debt

FRANK AND MURIEL NEWMAN
Last updated 09:05 24/02/2014

Interest rates are on the rise. The Governor of the Reserve Bank has for some time now been saying interest rates will rise and most economists expect rates to rise by 2% within two years. For most people that means they will be paying more on interest, and have less for the other things.

But, never fear, help is near! Here are some oily rag ways of getting out of debt. 

The first thing to realise is it's a whole lot easier getting into debt than out of it. Getting out and staying out of debt may require permanent changes about the relationship you have with your money. 

The key to getting out of debt is to figure out why or how you got into debt in the first place. If the reason was because of an ongoing issue, like spending more than you earn, then address that issue. 

If you don't know what you are spending your money on, keep a record of your spending over the next month.

Don't take on any new debt.

See what you have that could be sold to repay the really bad debt. Rummage through cupboards, spare rooms, garages and so on and sell whatever you are not using. Sell the second or third vehicle... the golf clubs and caravan that is never used, or the boat that costs money - go rock fishing instead!

If you have a credit card debt, consider what is known in the trade as a balance transfer.  For example, at the moment a major trading bank is offering to refinance personal credit card debt of new customers at 1% for one year. That's a heck of a lot cheaper than the 20% or so that most cards are charging on outstanding balances and it basically gives a person a year to tackle the debt rather than the interest. A word of caution: check the fine print for hidden fees and fishhooks.

Divide your debt into bad debt and really bad debt. Really bad debt is the expensive personal debt on consumable things that lose value like whiteware, cars and boats. Pay that off first. Bad debt is debt linked to an investment so the interest should be tax deductible. Bad debt should be repaid after the really bad debt has been cleared.

Get out of debt by giving up bad spending habits - expensive hobbies, excessive entertainment, fancy cars, and so on. Use that money to repay debt instead. Get aggressive about repaying your debt.

Lower your interest costs by improving your credit score. Credit scores have a scale running from minus 330 to 1000. The average score is between 500 and 600. A person with a score of 100 or below will find it difficult to obtain credit from a bank or finance company.  With a good credit score, you qualify for lower interest rates that can help bring down your total interest charges. You can improve your credit score by paying your bills on time, and by paying credit card debt. To obtain a free copy of your credit file go to www.mycreditfile.co.nz (see My Credit File). Your credit score matters.

Repay high cost debt through debt consolidation. This is where you top up your cheapest debt to repay expensive debt, e.g. topping up the mortgage to repay finance company debt.

These are just some ways to get on top of debt problems. A better way still is to visitwww.oilyrag.co.nz and read the hundreds of money saving tips from readers.

If you have a money saving tip you would like to share, send it to us by visiting www.oilyrag.co.nz - or by writing to us at Living off the Smell of an Oily Rag, PO Box 984, Whangarei. 

*Frank and Muriel Newman are the authors of Living Off the Smell of an Oily Rag in NZ. Readers can submit their oily rag tips on-line at www.oilyrag.co.nz. The book is available from bookstores and online at www.oilyrag.co.nz.

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