Is it time to ditch your - CREDIT CARD? - Understanding debt consolidation
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July 2019 | Vol. 2 | Issue 7
Is it time
to ditch
your
CREDIT
CARD?
Tips to get out Understanding
of debt fast debt consolidation
YOUR BEST
A publication by the Association of Financial Advisers INTERESTS
” THERE IS A GIGANTIC
DIFFERENCE BETWEEN
EARNING A GREAT DEAL OF
MONEY AND BEING RICH.
MARLENE DIETRICH
”
CONTENTS 12
How’s your
relationship
with money?
YBI MAGAZINE
6 6 ways to ease
your debt burden 15 Is it time you ditched
your credit card?
8 19
Tips to manage your
5 lifestyle tips tips to
money when in a
get out of debt fast
relationship
10 Understanding debt
consolidation 22 Buy now,
pay later
Vol. 2 | Issue 7 3
“ NEVER SPEND YOUR MONEY BEFORE YOU HAVE EARNED IT THOMAS JEFFERSON
NOTE
FROM THE
CEO
Debt is a complicated
and complex issue and
many Australians turn
a blind eye to it
Welcome to the July issue
of Your Best Interests
(YBI) magazine. Inside this issue you will find everything you
ever wanted to know about debt.
Debt is a serious issue for many Australians.
A recent report by ASIC found one in five We provide strategies to pay down your debt
Australians is feeling seriously overwhelmed faster. We explain the ins and outs of debt
by credit card debt. In fact, we collectively consolidation; give you the lowdown on how
owe over $45billion dollars and have opened you and your partner can get on the same
21.4 million credit card accounts in the page financially and provide plenty of reasons
last five years. why you should consider giving your credit
card the old heave-ho!
Debt is a complicated and complex issue and
many Australians turn a blind eye to it until it So, settle back, relax and get ready to discover
is too late. For this reason, we’ve decided to how you can face debt head- on and get a
shine a spotlight on the issue and devote the better understanding of how you can regain
entire magazine to better understanding debt. control of your money.
Of course, to understand debt we need to Until next time!
understand our relationship with money and
our money relationships, so we’ve turned our Philip Kewin
experts loose on the subject. CEO of Association of Financial Advisers
Vol. 2 | Issue 7 56
WAYS
TO EASE YOUR
DEBT BURDEN
Debt is one of the fixtures of
modern life for most people but
if you feel it’s getting out of your
control, it’s time to act.
Amanda Cassar, Adviser,
Wealth Planning Partners, AFA member
Fortunately, there are straightforward ways to
regain control of your money.
Start a debt management plan
This will mean prioritising your debts in order
of urgency, setting a budget, cutting expenses,
consolidating, and planning ahead.
1 Set a budget
Work out how much you spend each week
on your debts and discretionary spending and
how much income you have. It’s vital that you
are honest. From this you can work out how
much you need to service your debts to bring
them down to manageable levels.
2 Save on easy things
The most obvious way to reduce debt is
to cut down your spending on non-essential
Service each debt, be it
phone, mortgage or credit
items. Simple ways include doing things
yourself that you previously paid others to card each month
do, such as cleaning your house. Eat out
3
less. Cook at home and eat your leftovers at
work. Don’t buy things you don’t need at the Stop using your credit cards
supermarket and turn off lights and computers Pay cash. Put your credit cards away.
when they are not in use. Walk more or take The simple logic is that you won’t be tempted
public transport. to overspend if you only have cash.
6 yourbestinterests.com.auThe most obvious way
to reduce debt is to cut
down your spending
4 Pay the minimum on each debt
Service each debt, be it phone,
charges by consolidating your debts into one
low-interest loan.
6
mortgage or credit card each month.
Pay off as much as you can but at least pay Talk to a professional
the minimum, which will protect your Your adviser will work with you to develop
credit score. a debt management plan that’s specifically
5
tailored to you.
Consider a consolidation loan But if you are feeling really overwhelmed,
You may be able to reduce your interest seek help from your doctor.
Vol. 2 | Issue 7 7TIPS TO MANAGE
YOUR MONEY WHEN
IN A RELATIONSHIP
It may sound bleedingly obvious, Talk about it, talk about it, talk
but couples can reach their about it, yeh…
shared goals by keeping their At the risk of sounding like a lyric, it’s important
finances healthy. for couples to talk to each other about their
finances and how to manage them, to avoid
Amanda Cassar, Adviser, any potential conflict. Discuss your financial
Wealth Planning Partners, AFA member situation and goals, and any concerns you
may have. Chances are, you may have grown
up with wildly different parenting styles when
Whether saving for a house or holiday or it comes to money, and your personal ideas
seeking to grow or preserve wealth, couples about money are brought to the joint kitchen
can reach their common goals by managing table. The American Psychological Association
money well. Here are some practical tips for also suggests talking about your beliefs
managing your finances together. about money to help you better understand
8 yourbestinterests.com.auDiscuss your financial
situation and goals,
and any concerns
you may have
shared goals. Everything from big ticket
household items, new cars, holidays and
babies can be covered here.
Divvy up responsibilities
Sharing responsibilities for paying joint
expenses and building savings may help
ensure you and your partner are on the same
page when it comes to finances. You can opt
to split those responsibilities equally or put
the main breadwinner in charge of most of
them. Whatever you choose, it’s important
both are happy with the decision. Some enjoy
maintaining their own personal accounts and
contribute a set amount to a ‘family account’ to
cover all joint expenses and debts.
Create a budget
A budget usually tracks your spending on a
weekly or monthly basis, but often the very
mention of the word can make eyes glaze over
and you suddenly find that doing the ironing is
actually more interesting. So, if a budget isn’t
your thing, simply agree on how you will spend
– and save – your money.
if a budget isn’t your thing,
simply agree on how Build your funds
If you are married or in a de facto relationship,
you will spend – and you may want to consider helping each other
save – your money build retirement funds. You might explore
contributing to your partner’s superannuation
each other and set the stage for healthy account if your partner is not working or earns
conversations.[1] You may hold the ideas your a low income.
parents instilled, or have vastly different beliefs Before you make such an arrangement, it is
about money. wise to get professional advice on how it works.
Your financial adviser may talk you through
Set goals the rules of spouse contributions and the
Couples often have wide ranging and different requirements to become eligible for a tax offset.
priorities, but this doesn’t mean you can’t set Bet we can help with some other stuff too!
common financial goals and work together
to save for them. Keeping an open line of [1]
The American Psychological Association, ‘Happy couples:
communication about your aspirations may How to avoid money arguments’. Available at
help you adjust personal priorities to achieve http://www.apa.org/helpcenter/money-conflict.aspx.
Vol. 2 | Issue 7 9UNDERSTANDING
DEBT CONSOLIDATION
If you’re in danger of drowning
under multiple credit card
repayments, it might be time
to consider consolidating your
debt. YBI reports.
If you have a number of credit cards or
unsecured debts, chances are you are
paying a mountain of interest and making
multiple payments. If you’re finding this to
be a struggle, it could be time to consider
consolidating your debt.
Consolidating your debt won’t change the
amount that you owe, but it could change
the amount you pay. By consolidating all your home as security against the debt. If you
your unsecured debts into a single monthly suddenly find yourself unable to make your
payment, you may end up paying a lesser loan payments your bank could foreclose
sum each month to pay off your debt. But for your home loan. That’s not a situation anyone
debt consolidation to really work in your favour wants to be in.
you would need to secure a new loan at a
low-interest rate. Otherwise, you may end up Using a debt consolidation
paying more interest in the long run. company
You can consolidate your debt a number of If you opt to use a debt consolidation
ways but most commonly debt consolidation company to consolidate your debt they may
loans are offered via consolidating your debt or may not consolidate your payments into a
into your home loan, by taking out a personal new loan. This will depend entirely on your
loan or by using a debt consolidation company. circumstances. A debt consolidation company
could simply manage your debt by negotiating
Consolidating Debt with with your creditors. You make one single
Home Equity payment to the debt consolidation company
While it may be tempting to roll your debt and they distribute the funds to your creditors.
into your home loan, consolidating your debt It may lift the burden of your debt so you feel
with a home equity loan can be risky. Here’s less stressed but ultimately you will still be
why. When you consolidate your debt into paying off the same card or loans.
a home equity loan you are basically using
Taking out a Personal Loan
A personal loan can be used to consolidate
Consolidating your debt won’t your debt providing you can take out a loan
change the amount that you that is large enough to cover what’s owing.
owe, but it could change the The benefit of a personal loan is that it is
usually charged at a lot lower interest rate than
amount you pay
the credit cards you are paying off. However,
10 yourbestinterests.com.auBefore signing up to any new
loan arrangement be certain
to do your homework first.
sure to do your due diligence. Evaluate any
loan product carefully. You don’t want to end
up worse off than when you started.
Don’t accumulate new debt
Many people who consolidate their debt
find themselves back in debt soon after
consolidating. How does this happen?
Consolidating your debt frees up the
available credit on all those cards and for
many consumers, the temptation is too great.
They go back to spending on their credit cards
and then end up in a worse situation. Not only
do they have a loan consolidating their debt
but new credit card debt to pay off. If you do
decide to consolidate your debt it is vital to
destroy your existing credit cards and close off
your credit accounts so you do not fall into the
credit trap again.
to benefit from a low-interest rate personal
loan you would usually have to have a good Is there any other way?
credit rating. If your credit rating is tarnished Consolidating your debt is not the only answer.
you may end up with a loan whose interest You could also make a plan to pay off the
rates are not too dissimilar than your existing debts on your own. Do a complete budget and
credit card rates. evaluate where you can make savings and
commit to paying off one debt at a time. Better
Debt Consolidation Loans yet, speak to a credit counselling agency. A
Your bank or credit union may also offer a debt credit counselling agency can negotiate a
consolidation loan, with the specific aim of debt repayment plan on your behalf. Then
allowing you, their customer, to amalgamate you make one monthly payment to the credit
your debt. Debt consolidation loans vary, so counselling agency and they pay off your
it’s important that you choose wisely. This debts for you. Lastly, if your debt is outstanding
is often a case of ‘buyer beware’: a debt and has been put in the hands of a collection
consolidation loan may offer you a lower agency, you can negotiate a debt settlement
interest rate and lower monthly repayments but to pay off a portion of the debt to satisfy the
the trade-off may be the loan is paid off over a account to wipe the debt.
longer payment period. So, do your sums first Just remember with any type of debt
to ensure you really are better off. consolidation you are simply making an
arrangement to make it easier to pay. You
Beware of scammers still have the debt – but perhaps don’t feel so
Before signing up to any new loan burdened. However, don’t let this new ease allow
arrangement be certain to do your homework you to fall into further debt. Focus on paying
first. Disreputable companies abound so make down your existing debt as soon as you can.
Vol. 2 | Issue 7 11HOW’S YOUR
RELATIONSHIP
WITH MONEY?
If you had to define your Just remember, like in any relationship,
small changes can make a big impact.
relationship with money, are
Regularly paying attention to our partner can
you guys going strong? make our emotional bonds stronger, and
Or due for some serious focusing a little loving attention on our
counselling sessions? financial relationship can also yield dividends!
(see what I did there?)
Amanda Cassar, Adviser, It might just be time to sit down and have a
Wealth Planning Partners, AFA member stern chat with yourself and bring some clarity
12 yourbestinterests.com.auFocusing a little
loving attention on our
financial relationship can
also yield dividends
that careful friend, who has a budget and for
the most part sticks with it? They live within
their means and still don’t really seem to miss
out on too much.
I want you to think who you’d rather be
like and five ways you’d like to improve your
relationship with money.
• D o you have personal debt you’d like to
pay down or pay off?
• Is there a holiday you’d like to save for?
• W ould you like to start putting a little more
into your superannuation?
• Is your first home or an investment property
something you’d like to achieve?
• W ould you like to start a small share or
investment portfolio?
• Would you like to go to a better gym?
• Be able to afford a dog?
• Buy a membership?
Come up with at least five goals that have
something to do with money.
Next, I want you to prioritise them. What is
the most important objective you have? Did
something stand out as your number one
priority?
What love and attention can you bring to this
one goal, and what small improvements can
you make to start turning things around? Don’t
worry about all the other items on your list. You
can get there later. Just focus on your main
What small improvements priority and think of ways you can make small
can you make to start turning changes to make inroads.
things around? If you want to pay down debt, can you skip
the daily latte and put the extra $5 per day onto
the loan? That extra $100 per month means
into your relationship with the dollars. Look for you’ll be $1200 further ahead by the end of the
ideas on where you can improve. year. Will that help you get there sooner? As in
Observe your friends and family members much sooner?
and their relationship with money. Are they out I’d love to hear some of the ‘little things’
every weekend, have all the latest stuff and are you’ve done to start improving your relationship
constantly bemoaning the fact that they just with money and see if you become more in
can’t keep up with their bills? Or do you have love than ever once again…
Vol. 2 | Issue 7 13DON’T TELL ME
WHERE YOUR
PRIORITIES ARE.
SHOW ME WHERE
YOU SPEND YOUR
MONEY AND I’LL
TELL YOU WHAT
THEY ARE.
JAMES W. FRICKIS IT TIME YOU
DITCHED YOUR
CREDIT CARD?
Australians love their credit cards, with more than 20 million new
accounts opened in the last five years. But is your credit card right for
you? YBI reports why it might be time to cut up your card for good.
Australians are a nation of debtors. Consumer Of those, ASIC warns that more than half a
debt is at an all-time high. A recent report by million people are in arrears and close to one
ASIC found Australians are drowning in over million are in persistent debt.
$45billion of credit card debt. 21.4 million In fact, according to the survey, almost one
credit card accounts have been opened by in five Australians are feeling overwhelmed by
Australians in the last five years. debt, with many paying off debt on a card that
Vol. 2 | Issue 7 15is unsuitable for their needs.
Indeed, a review of the 21.4 million credit
card accounts opened in the past five years
estimated consumers could have saved $621
million in a single year if they had switched
to a more appropriate credit card with less
‘benefits’ and a lower interest rate.
In the 2018 Banking Royal Commission,
many of the big banks came under fire for their
credit card practices with Macquarie, Citi and
American Express coming under the hammer
for allowing grandfathered clauses to continue
despite the rules of the Future of Financial
Advice (FOFA), which banned all conflicted
commissions. From April of this year, the banks
have been forced to discontinue these product
commissions, but not before millions had been
paid by consumers in added interest.
10 of Australia’s largest credit providers
were part of the ASIC review (American
Express, ANZ, Bendigo and Adelaide Bank,
Citigroup (Citi), CBA, HSBC, Latitude,
Macquarie, NAB and Westpac). Each one has
given commitments to change many of the
practices that were adding to consumer debt.
These include taking proactive steps to help
consumers with problematic credit card debt;
fairer approaches for balance transfers and
commitments to restrict the amount by which
consumers can exceed their credit limit.
Nonetheless, credit card debt remains an
issue for many Australians.
Young Aussies are particularly at risk. ASIC
reports young people are more likely to be in
delinquency, with payments more than 60 days
Consumers could have saved
$621 million in a single year if
they had switched to a more
appropriate credit card.
past due or having had their debt written off by
the bank for persistent severe delinquency.
Balance transfers were also getting many
people into further trouble, due to a lack of
understanding around interest-free periods.
Following a 2017 Senate Inquiry, ASIC
warned these enticing credit card offers —
balance transfers from one card to another —
were ‘a debt trap’.
16 yourbestinterests.com.au“In the Senate inquiry’s view, these a credit card transfer and 930,000 with
transfers can be present a debt trap for persistent debt as of June 2017.
consumers… if they fail to pay off the balance If this sounds like an all too familiar refrain, it
in the promotional period, keep the card the may be time you considered doing something
balance was transferred from… or make new about it. Speaking with your financial adviser
purchases on one or more of the cards,” the about consolidating your debt may be the first
research said. best step.
In fact, 30 per cent of consumers increased
their debt by 10 per cent or more after Australians are drowning
transferring a balance to a promotional
“balance transferring” card.
in over $45billion of
550,000 people are in arrears following credit card debt
Vol. 2 | Issue 7 17A simple fact that is hard to learn is that the time to save money is when you have some. JOE MOORE
5 LIFESTYLE TIPS
TO GET OUT
OF DEBT FAST
Tired of being on the debt merry-go-round?
Adopt these changes and you could be
debt-free sooner than you think. YBI reports.
Vol. 2 | Issue 7 19Sometimes you need to make sacrifices today climb out of debt simply chopping out expenses
in order to build for a better tomorrow. When may not cut it. Forget incremental change! It’s
you’re struggling with debt, making some tough time to leap out of your comfort zone and make
choices now could set you up for a better some lifestyle changes that will allow you to pay
financial future. So why wouldn’t you take the off your debt faster.
plunge? They say ‘desperate times call for
desperate measures’ and when you’re trying to Ditch your car
Many Australian homes are a two or even three-
car household these days. If you’re one of them,
Don’t just mooch around the you have the potential to save a tonne of money.
house binge-watching Netflix. While you may initially baulk at the idea of giving
Get creative with your free time up your second vehicle, you will be surprised
by how drastically it can reduce your transport
20 yourbestinterests.com.auto pay off your debt. But remember to check
out any potential flatmates thoroughly before
they move in. You want to ensure they have
the financial ability to share your home. Think of
a housemate interview as not too dissimilar to
a job interview. Even if you get along well with
the person, it’s best to follow up with reference
checks, and by verifying their employment or
even reviewing their credit history.
Downsize your home
Perhaps you are now an empty nester,
bouncing around in a four-bedroom home
now the kids have left home. Do you and your
partner really need all that space? Moving to a
smaller home could significantly reduce your
mortgage rates (or rental payments if you don’t
own your home) and you can then put these
funds to good use paying off your debt. A
smaller home will also have lower maintenance
costs and will attract fewer property taxes such
as council fees and rates.
Cut back on your social activities
All work and no play makes Jack a dull boy
– but all play can be very expensive indeed.
Why not consider ditching some of your social
activities. Scale back the number of nights you
go out a week. Trim your takeaway budget and
aim to eat home-cooked meals more often,
Do you have a spare room in limit your restaurant going to once a week.
your house that could be used Make going out and socialising more of an
occasion. Something to be looked forward to
for living or as a home office? rather than an everyday event.
Use your free time to make
extra cash
costs. Even if you have paid off your car, getting Now you’ve cut back on your socialising you
rid of it removes all the ongoing maintenance will also find yourself with more free time
and on-road costs, potentially saving you on your hands. Don’t just mooch around the
$1000s. If getting rid of your second car sounds house binge-watching Netflix. Get creative
too drastic a measure, what about downsizing with your free time and consider kicking off
to a smaller vehicle that is more fuel-efficient or a side hustle as a way to make extra cash.
trading to a less expensive make or model? Jump on your bike and deliver food, pick up
some extra shifts at work or start that business
Monetise your spare room you’ve always dreamed of.
Do you have a spare room in your house that Making lifestyle changes takes courage,
could be used for living or as a home office? determination and stamina. However, if a little
Why not consider renting it out. Taking on a sacrifice now means you will be financially free in
housemate can free up cash that you can use the future, why wouldn’t you make the change?
Vol. 2 | Issue 7 21BUY NOW, PAY LATER
How afterpay and Zippay is Remember lay-by? Your great grandparents
changing buyer behaviour were likely big fans of it. Lay-by allowed
people to put a product aside in a store
Cec Busby and layaway the funds over time to pay for
it. Once you’d paid off the purchase price,
you were free to collect the product. There
was no interest accrued and payments were
smoothed over time.
Certainly, it lacks the instant gratification
expected by most buyers today, but for a
generation who had survived a war and been
through rationing, layby seemed like a mighty
22 yourbestinterests.com.aufine way to purchase the big-ticket items you
wanted but couldn’t immediately afford.
Today our appetite for consumption has
led many Australians down the rocky road of
credit card debt to the tune of $45billion and
counting. According to a recent ASIC report
discussed in this issue, young people are
particularly vulnerable to credit card debt.
However, that may be all about to change
thanks to the rise of new payment options such
as afterpay and Zip that provide an alternative
way to purchase the products you want when
you want. Today our appetite for
It could be said that afterpay and Zip take
consumption has led many
the layby model of yesteryear and tweak it
to suit the needs of today’s consumers. Australians down the rocky
Rather than wait until you have paid off your road of credit card debt
purchase to receive your product, these
payment alternatives allow you to buy now
but pay later. As an example, in the case of payments and the lack of interest is
afterpay, you can purchase a product and have proving a boon for this young generation of
it delivered but only make the first payment shoppers. However, some consumers may
two weeks after the initial purchase and then be exceeding their budgets. The majority
pay three equal payments over the following of respondents said they use the platform
six weeks. multiple times in a month, which could
Gen Z and millennials are taking to the provide the perfect storm for people to
platform in droves. As of July 2018, 2.2 million overextend themselves. 65 per cent of those
people in Australia had made a purchase with surveyed said that they typically had one-two
the platform and afterpay is available at over afterpay payments on the go each month,
10,000 retailers throughout Australia including while close to a third (29.3 per cent) admitted
a slew of big merchants such as Big W and that they had as many as three-five on the go
Kmart as well as airlines such as Jetstar. at once. 45 per cent of those surveyed said
It sounds like a win-win situation for all… But they were using afterpay more often than a
is it? debit or credit card!
In a survey of 1000 afterpay users, credit “The popularity of Afterpay has taken
comparison site Mozo found 30 per cent of Australia by storm, but we are urging Afterpay
respondents admitted to having missed at users to think carefully about potential
least one afterpay payment. While more than purchases. A $100 pair of jeans broken
six in ten (65 per cent) said the ability to make down into fortnightly payments of $25 is very
smaller payments influenced them to make appealing, especially when you can take
purchases they wouldn’t normally make. home the goods on the spot, but you still
So is this buy now pay later option creating need to pay for that product in full,” said Mozo
more debt? The answer is difficult to ascertain. Director, Kirsty Lamont.
On the one hand, the ability to smooth “Afterpay is highly appealing to shoppers
who don’t have the money on hand to make
a purchase in one payment, and therein lies
The majority of respondents the risk. Small payments are snowballing for
said they use the platform some users, resulting in late payment fees,
multiple times in a month potentially poor credit ratings and spending
beyond one’s means.”
Vol. 2 | Issue 7 23MANY PEOPLE TAKE NO CARE OF THEIR MONEY TILL THEY COME NEARLY TO THE END OF IT, AND OTHERS DO JUST THE SAME WITH THEIR TIME. JOHANN WOLFGANG VON GOETHE
YBI MAGAZINE yourbestinterests.com.au
VOLUME TWO: ISSUE SEVEN
Production Editor
Pinstripe Media PTY LTD. Pinstripe Media
Tower 3, Level 5, Barangaroo Avenue Cec Busby
Barangaroo NSW 2000 info@pinstripemedia.com.au
+61 2 8004 6464
AFA Contributors
Association of Financial Advisers AFA members;
Level 5, 257 Clarence Street Amanda Cassar
Sydney NSW 2000
+61 9267 4003
info@afa.asn.au
YOUR BEST
INTERESTS
Your Best Interests (YBI) is about financial advice and the difference it makes to the lives of everyday Australians.
It is a consumer initiative by the Association of Financial Advisers (AFA) to create a deeper understanding of the value
of financial advice.
YBI is dedicated to helping Australians make the right financial choices. It is a consumer resource that helps inform and
educate the public on the transformative power of financial advice.
YBI is published 11 times a year by the Association of Financial Advisers (AFA). The magazine is produced by the AFA,
Australia’s oldest association representing financial advisers, who believe that great advice is in the best interests of more
Australians. © 2019 Your Best Interests.
AFA disclaimer: Any advice is general and does not take into account your objectives, financial situation or needs so make
sure you consider whether it is appropriate for you. You should seek financial advice before making any decisions about
financial products or investments.
A.B.N. 29 008 619 921Coming up in Volume 2: Issue 8
Going How to
Kids and retire rich
money cashless
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INTERESTS
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