The economic crisis that we are all facing is making a lot of people rethink what they are doing. With interest rates increasing Adam Humphreys Director of Finance at LZR Partners has some suggestions on what you should be doing.
What would your suggestion be?
Well, it’s a case-by-case basis. My first suggestion is getting rid of your credit cards. If anyone’s got equity in their property and they’re paying interest on a credit card each month, the credit card interest rate is 20% versus a much lower home loan interest rate. Even though home loan rates are going up, you’re still getting a loan rate around 5% or lower on owner occupied rates. So are you better off consolidating your credit card debt, personal loan debt onto your home loan and getting rid of those limits on your credit cards? Getting rid of temptation that’ll reduce your monthly commitment overall. There is a fair amount of this consolidation of debt taking place in the market to reduce client’s monthly commitments.
Should they use their savings to pay their credit card off?
Possibly, but this is a case by case consideration. Ideally, your savings should be offset against your home loan, so you’re getting the benefit. Where people fall into the trap is they spend on their credit card, and they don’t pay it out each month. The bank then charges interest at approximately 20%, now you’re missing out. Your behaviours need to change to improve your situation.
What is your advice?
My advice is a simple case of getting rid of the credit card limits and operate on a debit visa against your savings. You’ll get a better outcome financially. That is becoming a serious consideration for a lot of people because they don’t understand the impact that the increased rates are having on them personally and they’re using credit cards to live on and bridge that gap. For example, I have a client on an income of around $200K a year, which we can agree is a good income, they’re trying to hold onto their house. They’ve now racked up $160,000 in personal loans and credit cards just by that behaviour.
What do you mean by behaviours?
When money was plentiful, they had taken on offers and consolidated credit card debt onto a personal loan, but then continued to use credit cards to build up more debt. Now as money has become more expensive it has got to a situation where it’s out of control. My challenge will be to work out what’s the best outcome. I suggest they get it all consolidated. Reduce that monthly commitment to one payment on your home. Cancel everything else. Simplify your life. You’ve got to get out of the debt trap.
I can give you suggestions, but in this case, they may need to go and have a financial plan done by a financial planner like Scott Martin at LZR.
