Debt Management

There are three basic principles to managing debt.

Consolidate Debts
Many people have several different types of debt. Home loans, store cards,credit cards and personal loans. Debt consolidation refers to the process of combining all of your debts into one loan.

Insure your income. Your ability to repay your loans depends upon on ongoing income. If something prevented you from working in the long term, could you keep up your loan repayments? Income protection insurance is a fundamental part of any financial plan.

Minimise Interest Costs
When consolidating debt, it is important to roll it into the loan that charges the lowest rate of interest. This will usually be a home loan. If you don’t own property, or there isn’t the capacity to increase your mortgage to cover other borrowings, shop around for the lowest interest personal loan you can find.

Interest offset accounts. Linking your savings account to your home loan. Interest is only charged on the outstanding balance of the mortgage account less the amount in your savings account. This means all of your money is effectively working to reduce the amount of interest you pay. However, the loan account is clearly differentiated from the savings account, and the bank will require regular repayments to be made on the loan.

Repay Lifestyle Debt Quickly
Lifestyle debt includes credit cards, personal loans and residential mortgages.Unlike investment loans, lifestyle debt does not provide any tax advantages, and paying it off as quickly as possible usually represents one of the best uses of surplus savings capacity. If you have outstanding debt and a surplus savings capacity, make sure you pay off the highest interest debt, such as credit cards, first.

Lines of credit. A line of credit is a loan you can draw from and repay at anytime. It’s like a bank account with a negative balance. Unfortunately, many people lack the financial discipline to use lines of credit effectively. They can lead to a blow out in ‘bad’ debt. Interest rates are also usually higher than on standard home loans.

Pay off credit cards within the interest-free period. Credit cards are convenient, and if you pay them off within the interest-free period, they can be a good use of debt. If you have difficulty in controlling your use of credit cards, and struggle to pay off the full balance each month, it may be a sign of trouble. One solution is to cut up the credit cards and use debit cards instead.

APS Benefits can help members take control of their debt - contact us on 1300 131 809 to find out how.