Taking steps to manage debt

By the resi financial blog team, 24 December 2014

Taking steps to manage debt

There has been some talk that the next direction for interest rates will be down – but that shouldn’t lull you into thinking you can start spending more.

Any reduction in interest rates is welcomed by borrowers, and with rates at historic lows, it is easy to forget that they can also rise. But it’s important to be prepared for that eventuality. Any borrowers who have overextended themselves will run into difficulties once rates rise again.

Preparing for a rate rise comes down to having debt management strategies in place. 

One of the first things you should do is calculate what your loan repayments will be with a rate that is at least 2 per cent higher than what you’re paying now. For example, if your mortgage is 5 per cent, work out what your repayments will be at 7 per cent. If you can’t comfortably meet the higher repayment, take action now to ensure you can in case this situation arises.

There are some great deals on interest rates at the moment – both fixed and variable – so take the time to check these out to make sure you are getting the best deal for your circumstances. If you are concerned that you are already overextended, you might want to consider taking out a fixed loan or partially fixing your mortgage. This way you can protect yourself against the effects of a rate rise.

It’s easy to get caught up in the Christmas spirit – but that January hangover soon kicks in when you get your first credit card statement of the year. Exercise caution when shopping or leave your credit card at home if possible. Paying in cash makes you appreciate just how much you are spending. And because credit card debt attracts a higher interest rate than your home loan, take steps to pay down as much of this as possible.

Another option is debt consolidation. By combining all debts into your home loan – which generally attracts the lowest interest rate – you not only save money, but you streamline your finances. But the key to success for this strategy is to pay off the extra debt as quickly as possible so it doesn’t accrue too much interest over the life of the home loan.

Categories: debt consolidation, debt management, debt management strategies, managing debt