SPEND RESPONSIBLY - Gaining financial control

Getting on top of your debt

Getting deep in debt doesn’t usually happen overnight. It takes time - often building gradually. And that’s also the best way to get out of debt – slowly, over a period of time. While there is no simple solution, sticking to a budget is one of the key steps in regaining financial control and reducing your debt. The following steps can help you get back on top financially.

1. Pay more than the minimum

The only way you will make serious inroads in your debt is to pay more than the minimum repayments. Minimum payments cover the interest charge with just a small reduction in the principal. By paying more than the minimum repayments you will lower the principal and thereby reduce the interest charge. That way you can start to turn the tide in your favour.

Let’s say, for example, that you have an outstanding credit card debt of $1,000 at an annual interest rate of 16%. If you stick to the minimum repayment set at 2.5% of the card balance, it will take you more than 15 years to repay the debt, at a total cost of $1,186. And that’s assuming you make no new purchases on the card and your card does not have an annual fee. On the other hand, if you devoted $100 to repaying the debt every month, it would be paid off in eleven months, costing you $81 in interest.

2. Prioritise your debts

List all your debts, ranking them according to the rate of interest (if you are unsure of the rate, check your statement or contact your lender). Concentrate on paying off the higher interest debts first. Once the highest-rate debt is paid off, add the total you were paying on this debt, to the next one on your list. This way, you will have more to pay off each debt on your list, with the benefit that these payments are already built into your budget.

Be sure to continue to pay the minimum amount owing on your remaining debts so that it doesn’t affect your credit bureau file.

3. Talk to your lenders

Reputable lenders would much rather find a suitable repayment plan for you, than have your payments overdue or worse, lose your debt altogether. If you can’t make your payments or are struggling to make the payments on time, it is important that you contact your lenders. If you are struggling with your home loan, you can apply to your lender for financial hardship provisions if you owe less than $500,000.

Explain to your lenders that you want to pay in full, but that you need more time to pay. Provide full details of your situation, and emphasise the positives - like a pending job offer. Explain that you are taking steps to reduce your spending, and show them your budget plus a suggested repayment plan showing a specific amount allocated to repaying each lender.

Some customers make the mistake of avoiding payments altogether as they fear contacting the lender. There is no need to be embarrassed; lenders are willing to try and help in these circumstances and its much better that you call before your credit history is affected. It is likely that they will revise your repayments and/or extend the time you have to pay.

A sample debt organiser or schedule that you can present to your lenders is outlined below. It will help you keep on top of your debts, showing the amounts you owe, together with the new repayments your credit provider has agreed to. For the record, send each credit provider a letter with the details you have agreed on.

If a credit provider or lender is not willing to renegotiate a new payment plan, ask to speak to a senior manager or a collections or credit manager to discuss your situation. If you prefer, you can write to the lender setting out what you believe you could pay and ask them to contact you to discuss your situation.

If you are still unable to agree a plan, contact the Department of Fair Trading, or Consumer Affairs office, in your state. You may be able to get a Court Order changing your repayments if you can show that:

4. Consolidate your debts

Debt consolidation involves combining all your debts into one loan. This can have many advantages including reducing your minimum monthly repayment, establishing a payment structure that will see the loan paid off in a structured way, setting a fixed monthly payment that helps with budgeting. In cases where you consolidate debt into a home mortgage, it can also reduce the interest rate.

Note though, that this strategy only works if you change the spending habits that got you into debt in the first place. You will need to be disciplined for this process to work.

5. Get professional help

The Australian Financial Counselling and Credit Reform Association (www.afccra.org) provides a list of contacts, which can provide free or low cost help with financial difficulties.

The following organisations can also help:

QLD - Credit and Debt Hotline – 1800 808 488

ACT - Care Financial Counselling Service 02 6257 1788

NSW – Credit and Debt Hotline 1800 808 488

VIC - Financial and Consumer Rights Council 03 9663 2000

WA - Consumer Credit Legal Service 08 9221 7066

SA - Community Legal Service 08 8362 1199

TAS - Anglicare Financial Counselling Service 03 6234 3510

NT – Anglicare NT 08 8985 0000

Sample debt organiser

Lender’s name	Account Number	Interest rate	Balance owed	Arrears amount and dates	Phone number, contact person, date contacted	Last payment date	Original repayment	New agreed repayment and commencement date