Top tips to wipe dumb debt
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Do you pay off your credit card each month?
I have just received some shocking news.
A personal loan, which by all accounts isn't big - $2800 - will apparently not be paid off until I'm 29 (I'm 26).
Up until 10 minutes ago, I thought a repayment rate of $100 a month was reasonable.
"Stace, you're doing awesome!", I'd tell myself when the money went in after each pay.
I have been doing okay - my loan is now down from $4000, and I've also gotten rid of a $2000 overdraft, but I thought I'd celebrate by taking it easy for a bit.
Having run my current dumb debt (boy, is it dumb), through the calculator at Sorted, Mousey told me I'd eventually have paid $3672 which included an additional $872 in interest.
It's safe to say that it's time I pulled finger again. It's ridiculous (read: dumb) that money isn't going into my savings to achieve the goals I've set.
But firstly, it's important to understand what dumb debt is.
Financial Literacy and Retirement Income Commission executive director David Kneebone called it "high interest debt that can be avoided".
"It's especially dumb if it's for depreciating valued items like dinner or entertainment things that you put on your credit card and then don't pay off within the interest-free period."
Credit card debt was particularly troubling, he said.
Latest figures showed New Zealanders owed $5.36 billion on credit cards. 66 per cent of that was incurring interest.
In the past year, New Zealanders incurred $628 million in interest.
"We all need to incur debt from time to time, but there are ways to be smart about it.
"We would encourage people to pay off their credit cards at the end of each month. Most cards have an interest-free grace period of 45-55 days."
It's also important to think about the true cost of something, because the key to shrinking debt is to pay off debt with high interest as fast as possible.
"Rank [your debts], think about a payment plan, and by all means have a celebration when you finish paying off a debt, but make it small. In fact, it's best to celebrate by making a payment on the next debt on your list," Kneebone said. (That's obviously where I went wrong).
"The reality of getting there can be a real challenge. But when you get to the end, you can quite literally feel a huge weight of anxiety you never knew you had (or perhaps you did), lift."
Before incurring any debt, whether it be a credit card, a loan or a hire purchase, he advised people to make sure they knew what they were in for.
Use a debt calculator - make sure you know how much in interest you will be paying and how much you would save if you paid it off sooner.
Kneebone also said to shop around.
"You might find you can get the same loan with only 12 per cent interest as opposed to 15. Or by extending you mortgage, you could get the same loan for only 6 per cent."
Good mortgage management was essential to managing debt well.
The consensus seems to be that the way we've dealt with debt, particularly since the 2008 global financial crisis, has changed.
We are better, but as we get more financially comfortable, old habits start to creep back in.
Kneebone said just 57 per cent of people with credit cards paid their debt off in full at the end of each month - that still left 43 per cent of people who didn't.
TOP TIPS TO WIPE DUMB DEBT
- Only ever borrow what you need to.
- Run it through a calculator - before you borrow, or charge to credit, find the true cost of what it is you're purchasing.
- Don't succumb to FOMO (fear of missing out). If you can, avoid dumb debt at all costs. If you don't have the money, then think "is this really worth me paying it off for months on end?"
- Rank your debts in accordance to interest - pay off the highest interest-earning ones first.
- Set up automatic payments.
- Reward your success (but not too much).
- Try and shed any expenses you don't need and put that extra money on your debt.
- © Fairfax NZ News