“Debt can turn a free, happy person into a bitter human being.” – Michael Mihalik
Debt can almost take hold like a powerful drug and lead you down a road that leaves you wondering where it all went wrong. Credit is addictive. The ability to purchase what you want or need right now with the ability to delay the consequences to your future self is so appealing but is fraught with danger. Unfortunately holding personal credit cards (one of the worst kinds of debt to hold) is steeply on the rise, perfectly highlighted by finder.com‘s statistics showing a credit card for every Australian adult in circulation accruing interest on almost $2,000 per month per card. Just to add some spice to the situation banks are throwing more credit cards at young kids entering adulthood, stores are offering 5 year interest free deals with no credit history checks and personal loans are being sold on late night TV.
Debt Isn’t Always Bad, Is It?
Holding debt in your name isn’t always a negative. The ability to borrow money and invest it in your future self can be great, however it’s important to understand what’s ‘good debt’ and ‘bad debt’ which I’ll be adding another post about in the very near future. Simply put, good debt is used for investment purposes so for the rest of this post I’ll be focusing on taking care of the short term credit options, or bad debt, that I’ve previously mentioned.
It’s worth noting that even holding some short term credit is not all bad. There are situations which can be resolved relatively pain free through the use of a credit card or small personal loan that in the past could have caused significant financial distress. The ease of access to credit, whilst needs to be considered with great caution does have some positive applications in society. What is important to acknowledge is that once you owe money on a credit card, personal loan, shopping card or even a mortgage that it’s almost always the right decision to focus all of your savings and excess cashflow to paying off your loans.
The key to good debt management is having a great budget in place. If you’re not sure on how to get started with your budget then please follow this link for more information. Hopefully if you’ve budgeted well you won’t need access to any short term cash but if you do prioritising clearing that debt must be your focus. So many young people will say “It’s fine, I don’t have any trouble with the interest repayments” but just to show you how significant a standard credit card can be try the moneysmart calculator on how much interest you’d pay making the minimum repayments versus $400 a month owing $2,000.
It’s not about whether or not you can make the interest payments, what matters is how much money you’re giving away to the banks for free.
Sometimes people can find themselves in situations where although they’d love to turn their financial situation around they just can’t quite find a way. Keep an eye out for more material around the ability to use 0% balance transfers, negotiating payment plans with the bank and more but if you’re in need of further advice around debt management now please feel free to contact me directly.
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