Everyone runs up a little credit card debt, right? A personal loan or two?
I reckon that’s what many people tell themselves to justify carrying heavy debt, however the simple fact is that out-of-control spending and poor credit card management are serious problems that are not sustainable and have to be tackled head-on. It’s not limited to credit cards, but that’s what I will mainly focus on within this post.
A recent study by Barclays uncovered some shocking statistics. They found that,
“Australian households are the most indebted in the world, according to research by Barclays, which warns that the country would be vulnerable in the event of another global financial shock. When it comes to household debt – which includes mortgages, credit cards, overdrafts and personal loans – Australia leads the global field, with credit continuing to pile up while the rest of the developed world is paying it down.”
The signs are all around us that this can’t continue for very much longer. Local shop fronts empty for much longer than usual, people using food banks more frequently, continued rampant spending at all times of the year and not just Christmas, and people just living for the moment and not thinking what the future may bring.
I blame this partly on our consumer culture and a Veruca Salt mentality, so therefore individuals should be educated to be more aware of the traps and pitfalls to avoid when it comes to their personal finances.
So, with that in mind I have looked back at our experiences so that I could document the 6 warning signs that your debt may be out of control, and what you may be able to do to get back in check. Not all of these things have happened to us, but we have close friends that we’ve helped who nearly went all the way, so to speak.
Just so you know, I am not a financial planner, nor able to give specific financial advice. The list below is just common sense ways to get your spending back in control.
1. You Pay for Everything with Credit Cards
You used cash when buying groceries, filling up the car, or to pick up a quick takeaway, but now you whip out the credit card for virtually all your regular daily purchases. If this sounds familiar, you are probably either in trouble or on the verge of it. While plastic is easy to use, the credit card balances you are building will come back to haunt you. If you are already carrying a large balance on your card, your new purchases will likely just hike up the amount of interest you’ll be charged each month. Paying off the minimal amount will not get you out of debt anytime soon.
Keep that in mind when you’re making your next purchase. It may help change your habits. And if you’re relying on credit because you just don’t have the cash, it’s time to take a realistic look at your budget and consider taking necessary changes.
2. You’re Adding New Accounts
What happens if you can’t pay your credit card or other bills? Some people may try to solve this problem by opening up new credit card accounts and using balance transfers to zero interest cards, or take cash advances to make required payments on their existing debt. They might also add a new account if their old cards have reached their credit limits.
This may solve the immediate problem, but it also digs you deeper into debt. If you’re in this position, it’s a sure sign that you need to get a handle on your debt and alter your spending habits as soon as possible.
3. Your Debt’s Just Getting Bigger
Here’s a sad fact: Even if you don’t keep spending and stop right now, your outstanding credit card balances may keep growing if you make only the minimum payment each month. That’s because the interest rate you owe on your outstanding debt is lumped in with your balance and grows. You then have to pay interest not only on your past purchases but also on that added interest.
Once again, it is time to get real and write down your income and outgoings in a budget plan that will help you to get your head above water and start paying down the debts.
4. You’re Missing Payments Each Month
Missed payments help no-one, and the added stigma increases your unhappiness and affects your capability to think straight. If you get to this stage all is not lost. Ask for help from your creditors, whether it be your bank, building society, or energy/phone company. Remember that it’s always a good idea to contact your creditors as soon as you can when find that you can’t make a payment and ask about temporary reduced payment plans, or other options. This step could help you prevent a bad credit rating or cancelled account, or even the threat of court action.
5. You Avoid Paying Your Bills
You have a stack of unpaid bills that just keeps growing. You screen phone calls or hide behind the lounge chair so you don’t have to talk to angry and persistent bill collectors.
If you’re in this situation, you won’t be able to sidestep the problem forever. You need to get a realistic sense of where you stand financially and begin contacting creditors, cutting you spending or taking other necessary steps (filing for bankruptcy) to get your financial life back on track.
6. Address the Root Cause
Spending more than you earn is the root cause and the path to misery. It is as simple as that. I once learnt this basic financial rule from a wise author the following quote;
“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”― Charles Dickens, David Copperfield
We’ve been there, we know. At one stage our credit card debt was over $23,000 at 18% interest. We just couldn’t get ahead in life. We were chasing the almighty dollar, thinking that the more material things I owned, the happier I would be. It doesn’t work that way. In hindsight we were very, very sad.
What saved us was setting a budget and we began to live within our means. It was one of the reasons we chose to adopt a more sustainable lifestyle. We know we couldn’t save the planet, if we couldn’t save ourselves from debt first.
Drafting a Budget
Setting a budget (yes I know it’s a dirty word for some) is the only way you will know if you incoming earnings and spending match or preferably you have a little bit left over that you can begin to pay down your debts. Once your creditors have been contacted, most will allow you to start a payment plan that will go a long way to getting back in control. You may have to seek financial advice to roll all your debts into one single low-interest loan so that you can spread the payments.
You can find a very simple and easy to use budget calculator over on the ASIC MoneySmart website. This site is a wealth of information which you can learn so much about personal finance matters. It is my go-to site if I need learn anything moneywise. Best of all, it’s free.
Shake the Consumer Tag
If you use it, it will help you to discover where the unplanned spending is occurring. Once you figure that out, it is as simple as reducing your spending or begin selling off unnecessary stuff to pay down those burdening debts.
Note; I haven’t used the label of consumer during this entire post until now. I believe that because we were not born with this label, it shouldn’t be used. We are just ordinary people trying to find our way in the scheme of things. This label is one given to society as a whole by the media. I detest it.
So friends, what do you say? Have you ever paid off large amounts of debt and got back on track? How did you do it?
Hi Gavin two things that I think trick up young people or mature people are the “interest free loans” at the electrical or furniture store and also the “transfer your credit card balance with zero interest for six months”.
If you use these correctly they can be great but you have to know the traps and these finance companies are really not there to help you they are there to make money.
Eg years ago I bought a new fridge on interest free and let’s say it was $1,200 for 12 months interest free and the document says you only have to pay $50 a month (example here) so doing basic maths in order to pay off the $1,200 fridge over the interest free period I would have to pay $100 a month for 12 months even though I’m only required to pay $50 a month. ***the trick is to divide the total interest free loan by the number of months the loan is for ie 12, 24 or 36 months and make that payment every month and you will have paid ff your interest free loan in the period. If you don’t do that the minute that interest free period is over the interest rates will be 2 times or 3 times more than a normal loan. This is why they make money and you pay a ricidulous amount of interest. So divide the total interest free loan by the number of interest free months and pay it off.
The other thing (don’t quote me on this) it is my understanding is when you transfer your credit card balance to another bank for a 6 month interest free period you cannot buy items on that credit card during that period other wise interest rates apply.
There is no such thing as a free lunch however oth these methods are great if you understand them and use the “interest free periods” to your advantage.
Regards Kathy A, Brisbane
Lynda D says
I agree Kathy. I had furnished my entire house on interest free and not paid anything except the small monthly fee. Recently i bought all new appliances on 5 years interest free and before even receiving an account i called and ask what my BPAY and REF codes were so i could start now. The customer service said “oh, you dont have to start paying yet, wait for your first bill (which still hasnt arrived). I insisted and now im at least a month ahead making small weekly Bpays in advance. Its the only way to use this form of credit.
The Veruca Salt mentality comment made me smile Gav. I played her in a primary school production of Willy Wonka – evidently I play a great spoilt brat.
I pay for everything on credit card, then pay the full balance every month. That way I keep my entire spending in my offset account for another month, and save money on my mortgage.
Paying cash costs you money. If you do what I do you can earn interest on the money for up to 6 weeks at the bank’s expense.
Lynda D says
I do this as well Stephen, but it takes discipline. You need to have all your wages deposited onto your mortgage and only withdraw what you need. I really stuffed this up 15 years ago but now i have learnt my lesson and can manage it.
Lynda D says
The money i spent on my credit card with you at the weekend workshop has already been cleared – phew!!! I feared a telling off from my mentor.
This is a great post Gavin and so needed. Debt is a nasty subtle beast with many disguises. I’ve been relatively lucky – I was bought up that if you wanted something you saved up for it, so i never got into credit cards; I did, however, have store card with my favourite clothes store. It ticked along quietly in the background and each month the direct debit payment went out and when I needed new clothes for work I’d pootle along and get them (which wasn’t very often I hasten to add). When my husband and I started to talk about buying a house we looked at our finances with fresh eyes and what do you know there was a solid debt of £1500. Wow! We immediately reprofiled my finances and I paid it off in 6 months. What a relief. Now our only debt is our mortgage. I had a good credit rating so we got the mortgage through my bank at a great rate (hubby was a contractor at the time and banks have not faith in contractors despite his working for internationally reknown firms and earning stupidly large wages); now we pay all our bills, mortgage and food bill out of my wage and hubby’s wage goes into the savings account to pay lumps sums off the mortgage at a faster rate. We also use that account for holidays – we didn’t have one last year we were so keen to get to our savings target. I recently took advantage of a free financial adviser session and was gratified to learn we were doing everything right – in fact she suggested we might want to loosen the reins a little and take a holiday!
Great post Gavin. There is an add on TV at the moment about transferring your balance to a 0% credit card and the lady in the ad says ‘now I can spend that money on the things I really need’ it makes me want the scream. Surely the thing you need to be spending your money on in this situation is pay off the debt not buying things.
I think that visa debit cards are a great solution for people to wean them selves off using credit cards.
This is really a greet one!
I have never had and ever will have a credit card.
I don’t need it. It’s that simple.
The only debt I’ve ever had was the morgage.
And it was only 25.000€ (in 1995).
We bought an old house and we are still in restoration, 20 years later.
This year we are 25 years married.
I asked my wife what she would find really nice for the celebration.
A kitchen she said.
I’m installing a kitchen this year, 12500€ all in.
I’m half way now.
I’m just saying: we do not buy stuff we cannot afford at any time.
Interesting post. I’ve never been in debt myself, but a few years back I was spending pretty much my whole income. I was just as much in the consumer mindset, but justified the excessive spending by saying I could afford it. But it was far from the best use of that money. I now invest more than half my income and my spending is drastically down. I still have to be consciously frugal, it doesn’t come naturally, but I am much happier with where I’m headed financially. Just because I didn’t have debt doesn’t mean I was being financially smart.
I grew up in the era when credit (aka plastic cards) was not available. Consequently I learned to just save up for anything I wanted. The only time I borrowed money was to buy my first house and I made sure I paid that debt off in record time.
I don’t have a credit card now; I have a debit card (mainly to buy things over the internet), so I’m using my own money for it, not the bank’s. Otherwise I use cash for everything and I’m retired and living off my savings, not getting regular pay rises or an indexed pension (oh, I wish!).
I budget for everything….personal spending, food, household costs….and I keep my spending records on a spreadsheet so I know where I am with it. Household budget is the only thing that keeps increasing as the cost of running a household keeps increasing.
I can’t understand how anyone would willingly go into debt to buy small items (a house is another matter). Is it lack of will power or what? I couldn’t live with the insecurity of always owing money.