While a little bit of debt may not hurt, having a large amount of debt can be an overwhelming experience. Apart from hurting your credit score, a debt spiral can keep you from achieving your financial goals.

According to the Australian Bureau of Statistics, nearly 2 million Australians have some form of debt, and Australian household debt is among the highest in the world. An increasing number of reports have shown that many Australians have a debt problem.

While a little bit of debt may not hurt, having a large amount of debt can be an overwhelming experience. Apart from hurting your credit score, a debt spiral can keep you from achieving your financial goals.

If you are trying to get out of debt and you’re looking for practical ways to manage debt more wisely, you have come to the right place. In this article, we will share practical tips to manage your debts.

The decision to get out of debt can be life-changing if you’re willing to focus on the ultimate goal. With effective planning and making fundamental changes to your lifestyle, it’s possible to dig your way out of debt.

As you prepare your get-out-of-debt plan, keep in mind that some debt isn’t bad. Before we delve into how to get out of debt, let’s look at the difference between good debt and bad debt.

What Is Good Debt?

Good debt refers to debt that helps to build a long-term wealth. For example property and shares are generally popular. Or a dental practice purchased of a new dental chair or x-ray machine. These assets can generate income & grow in value.

Even good debt comes with risks, such as an inability to repay it.

In other words, good debt can be considered as any debt that you can repay responsibly and help build long-term wealth. However, remember that too much of any kind of debt turns into bad debt if you don’t have money to pay for it.

What Is Bad Debt?

Bad debt refers to any kind of debt you are unable to repay or a debt that drags down your financial situation and does not generate income. Examples of bad debt include credit cards, personal loans and Afterpay.

Here are some tips on how to manage your debt.

  1. Know How Much You Owe

If you feel overwhelmed by debt, start by making a list of your debts, including how much you owe and to which creditors, the interest rate on each loan, monthly payments, and due date. Organizing your debts from the most urgent to the least urgent will help you determine which loans need to be repaid as quickly as possible and then work your down. Having a comprehensive list of all your outstanding debts will allow you to see the bigger picture. Be sure to update your list every month as the amount you owe changes. You can leverage online tools to manage your debt portfolio.

  1. Put Together A Monthly Budget

Once you have a clear picture of all your outstanding debts, draw up a monthly budget plan. An effective budget helps you to track your monthly income and expenses so that you can understand how much debt you can afford to repay monthly. Once you have a budget in place, think of ways to reduce your expenses and dedicate the money towards repaying your debt.

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  1. Pay Off Your High-Interest Debts First

Paying off high-interest debts first is often a good strategy because such loans cost you the most money. Afterpay and credit cards are often the main culprits. Prioritising high-interest debts will save you money in the long run, thereby allowing you to get out of debt much faster. However, you can prioritize your debts based on what works best for you.

Some people choose the snowball strategy which involves paying off the smallest debts first. Once you’ve repaid the smallest debt in full, use the money you were paying for that debt and dedicate it towards paying off the next smallest balance. The snowball method can be psychologically motivating as it creates the feeling that you’re making progress.

  1. Focus On One Debt at A Time

One of the mistakes most people make when trying to get out of debt is focusing on multiple debts at once. While this strategy may work in some cases, it has proven to be a bad move, especially if you don’t have multiple sources of income. It’s a good idea to focus as much cash as possible on paying off one debt.

  1. Pay Your Debts On Time

Late payments may come with late fees and added interest charges, thereby increasing the amount of your outstanding debt. Besides, late payments may hurt your credit score. You can set alerts and reminders for your monthly reminders to avoid missed payments. If you happen to miss a payment, ensure you make the payment in question as soon as you can instead of waiting for the next due date.

  1. Look For Opportunities To Consolidate Your Debts

Debt consolidation is a process in which you take out a new, low-interest loan to pay off other debts.  In other words, debt consolidation rolls several debts into a single loan with an extended repayment term. If you are overwhelmed with multiple debts, you might consider consolidating several existing debts into a single loan with a lower rate.

This option is recommended for people who are burdened with a huge amount of high-interest debt.

Debt consolidation may help you repay your debts earlier, which means you’ll pay less interest overall. Besides, combining multiple outstanding debts into a single loan can help you streamline your finances in the sense that you don’t have to worry about multiple due dates each month. In addition to streamlining your finances, consolidating your debts could lower your overall interest rate and reduce your monthly payments.

However, you need to be a little bit more careful when considering taking out a debt consolidation loan because making a wrong move could worsen the situation. Moreover, if your credit score is less than ideal, it may be difficult to access the most competitive loans. Also, keep in mind that debt consolidation may not solve underlying financial issues. For debt consolidation to work, you need to curb your spending, have a solid debt repayment plan in place, and embrace healthy financial habits.

You should only consider consolidating your debts if you have a good credit score and if you can afford to repay the loan. You’ll need to exercise unwavering financial discipline for you to succeed when it comes to debt consolidation.

How do you get a debt consolidation loan in Australia?

If you decide to consolidate your debts, here are the steps to follow:

Step 1: Get your credit score report from credit reporting bodies such as illion Credit Check, Equifax, and Experian.

Step 2: Determine the amount of debt you want to consolidate

Step 3:  Research different lenders to see eligibility requirements, loan terms, and fees.

Step 4: Get prequalified and submit a formal application. If you’re approved, you’ll receive funds.

Step 5: For credit card debts, some banks offer balance transfer with 0% for 2 years or 3 years for a small fee. This will allow you to pay down your credit card debt over the 2-3 years without the high interest charge.

  1. Set Aside Emergency Savings

It’s always a good idea to have funds set aside in a savings account to cover unplanned expenses or financial emergencies. Having an emergency fund reduces the chances of missing repayments or accumulating more debt in the event of a financial emergency.

How much should you save for an emergency?

As a rule of thumb, you should put away at least three to six months’ worth of your living expenses to cushion yourself against unplanned expenses and financial emergencies.

  1. Talk To Your Creditors To Negotiate Lower Rates

If you have always made your payments on time and maintained a good relationship with your creditors, consider calling them and negotiating for a lower interest rate. Your creditors may be willing to lower your interest rates and make it easier for you to get out of debt. In addition, your creditors may be willing to set up a repayment schedule that fits your budget.

Also, if you have savings or second job, call your creditors and see you can negotiate a discount for early repayment on the balance of the debt.

  1. Talk To A Financial Counselor If You Need Help

Being in debt can be overwhelming, especially when you have multiple debts that need to be repaid. If you need help with developing a debt repayment plan, get in touch with a financial counselor. A professional financial counselor can help you come up with a plan that will enable you to overcome your debt problem. A good financial counselor will evaluate your debts, income, budget, and goals and then help you create a debt repayment plan that will get you out of your debt situation.

Some of the mistakes people make when trying to get out of debt include:

  • Creating an unrealistic budget
  • Trying to pay off multiple debts at once
  • Not putting away emergency funds for rainy days
  • Not checking credit card report for inaccuracies
  • Closing accounts after paying debts off

If you can avoid these mistakes, it will be much easier to pay off your debts. If you need help with getting out of debt, you can speak to a credit counselor or a financial advisor.

Final Thoughts

If you’re stuck in a cycle of debt, take action instead of hoping for the best. The consequences of defaulting on your debts are disastrous. The sooner you start dealing with your debt, the sooner you’ll pay it off and the sooner you can work toward achieving your financial goals.

Contact us to see how we can help you.

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