Paul Clitheroe.
Paul Clitheroe.

One in three struggles with debt

Over the last few months we’ve watched events pan out on the other side of the world that reinforce the importance of managing debt carefully.  

Unrest in Greece, tough economic measures in Ireland, and now a so-called austerity budget in Italy are all legacies of the irresponsible use of debt. These issues may involve governments rather than households but the key message remains the same – don’t take on more debt than you can comfortably manage.  

It can be hard to comprehend how an entire nation ends up going cap in hand to its creditors. Yet that is what’s some of Europe’s smaller nations are being forced to do. Thankfully, here in Australia our national debt is at quite manageable levels.  

Nonetheless the latest Consumer Credit Expectations Survey by credit agency Dun & Bradstreet shows that many households may be facing a debt crisis of their own.  

According to the survey, almost one third of Australians (30%) will struggle to meet their debt repayments over the next three months.  

Worryingly, 37% of respondents say they’ll use their credit card to buy something they couldn’t otherwise afford. And 21% expect their household debt will increase over the coming quarter.  

The news isn’t all bad though. On the plus side, we’re putting the brakes on new debt. Only 19% of Australians intend to apply for a new home loan, personal loan or credit card over the next three months, down from 33% in June 2009. Among those of us who hold a credit card, only 8% intend to apply for a credit limit increase over the coming quarter.    Still, it’s clear that many families are doing it tough on the debt front. If you’re struggling with repayments, an important first step is to put your spending under the spotlight.   

It can help to keep a spending diary for a week or two. This will show exactly where your money is going, and chances are you’ll find plenty of little-but-often outlays that quickly add up to much larger amounts. Cut back on these and you’ll free up money for repayments.  

Refinancing your debt to get a better deal, either by switching to a cheaper home loan or using a balance transfer offer on your credit card can lower your repayments. The trouble is, these all take time to arrange, and they may not be the answer if creditors are already asking ‘where’s the money?”  

If this sounds like you, contact your lenders and try to renegotiate a repayment plan. Do this before you miss a repayment, otherwise you could tarnish an otherwise healthy personal credit record.  

If you need help cutting your spending or approaching lenders, a financial counsellor can help. Many provide a free or low cost service. Take a look at the website of Financial Counselling Australia to locate a counsellor new you.    

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.  

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