Bad Debt and Very Bad Debt

 Read more Oily Rag articles by Frank and Muriel Newman 

Debt is unfortunately an all too common problem that affects everyone: individuals, households, businesses, local authorities, and governments. But never fear, help is near! Here are some oily rag ways of getting out of debt.

The first thing to realise is that it’s a whole lot easier getting into debt than getting 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. Think of it like BP’s oil leak – if you don’t plug the leak, it will become a disaster of catastrophic proportions. In other words, stop spending more than you earn!

If you don’t know what you are spending your money on, keep a record of all 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 and go rock fishing instead!

If you have credit card debt, consider what is known in the trade as a balance transfer.  For example, at the moment a major Ozzie-owned trading bank is offering to refinance the personal credit card debt of new customers at 5.95%, for as long as it takes to repay the transferred balance. That’s a heck of a lot cheaper than the 20% or so that most cards are charging on outstanding balances. The money saved on interest (about $550 a year for someone with a $5,000 debt) could then be used for repayment of the debt. 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 really bad debt is paid!

Get out of debt by giving up bad habits – like drinking, smoking, gambling, recidivist wining and dining, 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. In August last year, Veda Advantage introduced a credit score for New Zealanders. The scores have a scale running from minus 330 to 1000 although most New Zealanders will have a score above zero and 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 off your credit card debt. To obtain a free copy of your credit file go to www.mycreditfile.co.nz (see My Credit File) or call 0800 692 733. Your credit score matters.

Refinance your mortgage if you can lower your interest rate but it will need to be by at least 1% to make the effort and cost worthwhile. Ask your bank or a mortgage broker to advise you on this.

Repay high paying debt through debt consolidation. This is where you top up your cheapest debt to repay expensive debt – for example topping up the mortgage to repay credit card or finance company debt.

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

If you have some favourite money-saving tips, share them with others by visiting the oily rag website (www.oilyrag.co.nz) or write to 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.