Wednesday, 4 January 2012

Get out of debt

A credit card is one of the worst things you can own, and yet one of the most useful.  It's like yummy yet you know you are going to pay for it later.

It's the same with credit cards.  They provide you with fast, instant, easy ways of buying cool stuff, and yet the rates of interest are astronomical.

Do you get those letters in the mail asking you to sign on the dotted line for an extra few thousand dollars increase in your credit limit? That's because the credit companies know that the more you have the potential to spend, the more you will spend, increasing their profits through larger interest repayments.  While they want you to make regular payments off your card, they don't want you to ever fully pay off your debt because then they won't earn any interest.

The best credit customers are those that accumulate a few thousand dollars credit, struggle to pay it back, and really only just keep up with repaying the interest and new purchases.  Are you one of those people that never sees a zero credit balance owing on your card?  The credit companies just LOVE you.

So the solution is not to be one of those people.  The way you get there is a three-pronged attack.

1) Dramatically reduce the number and amount of credit purchases.  Limit yourself to only those purchases that are absolutely necessary that can't be made with an EFTPOS card or cash, and only when you have the cash on hand or in your bank account to pay it back immediately.

2) Never use a credit card to obtain credit!  If you don't have the money available then you can't afford to spend the credit that is about to be loaned to you, plus interest.

3)  Reduce your discretionary spending to only those purchases necessary to live.  Do this for a while and you will hopefully be able to make additional repayments on your card to reduce the principle, reducing the monthly interest repayments, and making it easier to repay the entire amount.  If this isn't working you need  to find money in other ways.  Have a garage sale and sell stuff you don't need on eBay.  you've got to get that principle down as fast as you can!

You may also have to change your credit provider.  If the interest repayments are killing you, swap to another company that offers low interest rates on transferred credit.  This way you can work on paying off the principle debt without being slugged by huge interests costs.

Also, be vigilant.  Don't succumb to that easy expensive purchase where they offer you a few years interest free to buy a new lounge suite, fridge or computer.  Like I said, if you don't have the money you can't afford it.  Pay your credit debt off first, then save for your new lounge suite the hard, conventional way.

The opposite to this rule can be investment debt.  Taking out a loan for an investment property used to be one of the best things you could do, assuming the rental repayments can pay for the interest and your own additional repayments can pay off the principle.  This is also assuming that house prices are going to increase, which unfortunately you can't assume any more.

I'm not a financial expert, and my advice shouldn't be taken as strict financial gospel, but if I owned investment properties right now I'd be selling them.  Given the current global financial situation and the potential for an extended recession, or even a never-ending depression, I'd recommend talking to a financial advisor about other safer ways of investing your money.


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