Aussies lead world in personal debt
By Vanessa Tripodi
Australians are proud to be leaders when it comes to
sporting achievements or new inventions, but the leading
position no one wants to hold is that in the race to be the
nation with the highest personal debt. Unfortunately for
Australia, personal debt Down Under has overtaken even that
of the typically credit-hungry U.S., according to Reserve
Bank of Australia figures.
To compare Australia's position on the debt leader board to
the U.S., each Australian adult is currently in debt to the
value of around US$56,000, compared to the debt of American
adults of US$44,000. Australians' mortgage,
credit card debt and personal loans total over AU$1.2
trillion, which is an increase of 71 per cent from just five
years ago.
However, it is not simply the fact that Australia is leading
the world in personal debt that deserves attention, but also
the amount of debt. Thanks to recent stimulus packages and
first homeowner boosts, Australia's personal debt has risen
to 100.04 per cent of the annual GDP; this is the first time
debt has exceeded 100 per cent, and Australians are now
living beyond their means, often dangerously so. Interest
rates in Australia have been low for some time, and the
Australian government has been providing financial
assistance to those who need it, meaning many Australians
are now stretched very close to their limits in terms of
debt. If interest rates keep rising as predicted,
Australians could have a financial crisis of their own when
they can no longer meet their repayments.
Some are also saying that Australians have reason to be
worried because Prime Minister Kevin Rudd has maxed out the
national credit card, too, so to speak. Offering Australians
stimulus packages to the value of AU$42 billion, the
Australian government was proud at the time that these cash
injections were some of the biggest, relative to population,
in the developed world. However, this government spending
has consumed the entire budget surplus and left the country
with a substantial deficit.
With little chance of more government cash handouts now that
the government, too, is heavily in debt, Australians need to
be aware of how to manage their current debt and avoid
accumulating any more.
Tips to reduce your debt:
- Pay your mortgage more often. Paying more money more often into your mortgage may sound obvious, but when you make your mortgage repayments weekly or fortnightly instead of monthly, you are going to reduce your debt faster. There are more opportunities to pay your mortgage weekly rather than monthly and you'll pay off more overall, as some months have five weeks and many finish midweek.
- Pay the minimum off on all of your credit cards but one. Choose a card with the highest interest rate to knock that out first, or the one with the lowest interest rate to pay it off faster. Then pay as much as you can off of this card, while paying the minimum on the rest of your credit cards. Once that targeted credit card is paid off, take the money you were using to pay it off and use it to pay off the next credit card, while still paying the next card's minimum, too. You won't miss the payments, as you're used to making them all, but you'll be able to reduce your credit card debt faster.
- Pay more than the minimum on your credit cards whenever possible. If you are able to pay more than the minimum on all your credit cards, or if you have just one card, then you'll be able to reduce your credit card debt, too. Paying just the minimum means that credit cards can take years to pay off, as the credit card issuer wants to keep you trapped in their card.
Tips to avoid debt:
- Cut down on binge buying. When you buy things you don't really need, you are eating into your weekly budget and these extra binge purchases usually go onto the credit card. Therefore, if you can plan your shopping and spending to avoid unnecessary purchases, you can also avoid unnecessary credit card debt.
- Use a debit card, not a credit card. Debit cards look and act the same as a credit card, but they are linked to your everyday transaction account, so you are spending your own money. There are no monthly payments to worry about or interest rate charges and you can enjoy the security of credit card payments online, over the phone or in person.
- Create an emergency savings account. If you make regular contributions to a separate savings account each week, you can build an emergency fund to cover unexpected bills or emergency car repairs, for example. Then you don't have to put these costs onto your credit card or dip into your home mortgage overdraft.
Just because Australia is leading the world in personal debt doesn't mean that your personal debts have to lead you into a financial crisis of your own. Instead, focus on reducing and avoiding credit card, home loan and personal loan debts to gain financial security.