Avoid these costly mistakes when trying to reduce your debts
Consumers are damaging their financial health by using the wrong debt-reduction strategies.
Reserve Bank data shows household debt in Australia ballooning to record levels compared to household income, and borrowers are being urged to avoid the common mistakes that can cost them dearly.
Marketplace lender SocietyOne's CEO, Mark Jones, said not knowing what you owed - or the interest rate being paid - was a key error.
"Apathy can cost you a lot in interest," he said.
A lack of understanding around loans, when combined with bad habits such as impulse buying, can be extremely costly.
Some borrowers keep money in cash deposits earning next to nothing, or offset against their home loan interest rate to save 3-4 per cent, but still have thousands of dollars of credit card debt costing them 20 per cent interest a year.
Others have jumped on the buy now, pay later bandwagon, embracing products such as Afterpay and Zip Pay that technically don't charge interest but impose costly penalties on people who don't repay on time.
Mr Jones said another debt-reduction mistake was being dazzled by zero per cent balance transfer credit cards.
"The problem is even if you do pay the transferred debt off in the interest free period, the temptation of a card is still there in your pocket and you're likely to make new purchases charged at high interest … and so the circle of debt starts again," he said.
Mr Jones said people should make a conscious effort to change their borrowing habits and look for products with an end date, such as a personal loan.
Consumer finance specialist Lisa Montgomery said borrowers sometimes got the wrong advice around reducing debt, while others used credit repair or debt advice companies that charged high fees.
"They pay money for someone to reorganise their finances when they really could have employed some simple strategies and not have to pay a company to do that," she said.
The Australian Securities and Investments Commission has previously warned consumers against paying high fees to credit repair firms and debt solution services, especially when free financial counselling is available.
Debt consolidation can be a powerful strategy as long as it's done correctly.
Ms Montgomery said it was dangerous to consolidate consumer debts into a mortgage but not change your behaviour.
"Sometimes people think it's the amount of debt that's getting them into trouble, but often it's not that - it's the actual behaviour of spending money," she said.
People who consolidated consumer debts into their home loan and then took 25 years to pay it off could spend much more on interest overall, Ms Montgomery said.
She said it was "never too soon" for people struggling with debt to approach their financial institution. "They will often have a solution rather than letting that debt spiral."