Simple tricks to slash your debt quickly
HOUSEHOLDS are swimming in debt, and many are ignoring some simple strategies to pay it off faster.
Reserve Bank of Australia data shows mortgage debt has jumped 78 per cent to $1.2 trillion in the past decade, while credit card debt is still near record highs and is costing consumers more than $6 billion a year in unnecessary interest.
Despite RBA official rate cuts in recent months, average interest rates on credit cards have actually climbed this year to almost 20 per cent, while unsecured personal loans are slugging borrowers with 14 per cent interest.
The first step in cutting debt is understanding why you have it in the first place, says AMP financial adviser Darren James.
"Is it because you haven't got your cash flow right?" he said.
"Be in control of your debt - otherwise it will end up controlling you."
Mr James said three ways to decrease debt included:
1. Paying off the highest-interest debt first (usually a credit card): "That's the one that's costing you the most, even though it may not be the largest in physical dollars. It's doing the most damage through higher interest rates."
2. Eliminate your smallest debts early: "If all things are equal, attack the smaller ones first because it creates a sense of achievement."
3. Consolidate debts into a lower-interest loan: But be aware that mixing a short-term personal debt into a mortgage could extend the repayment period to 20-plus years. "Try and maintain maximum repayments as much as you can to get the debt paid off," Mr James said.
Another option is a zero interest balance transfer credit card, which can dramatically cut interest costs. But make sure you repay the transferred debt within the interest-free period, and don't load up the old card with even more debt.
The average credit card debt is $3273, according to RBA data, and many consumers juggle more than one card.
If not repaid, that $3273 can expand to almost $7000 in just four years through compounding interest.
Wealth on Track principal Steve Greatrex said many people needed to educate themselves about how costly it was to pay interest.
He said it was "surprisingly common" for people to have thousands of dollars of cash in the bank while also having a credit card debt at a 20 per cent interest rate.
"In most cases you should be getting rid of personal debt first," he said. "Have a hierarchy of paying: the high-rate credit cards, then personal loans, then move down."
Mr Greatrex said people should always question themselves before taking on new borrowings and ask "do I need this debt?".
A loan for a new car was a good example, he said.
"Borrowing money to get an asset that's falling in value is almost always going to be a bad decision from a financial point of view."