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Regain your mastery over debt

Being honest with yourself and taking real steps to contain debt can change your life, writes Neal Vaughan.

Out-of-control debt is an insidious force that hurts you financially, emotionally and socially. But some simple steps and commitment can undo that damage.

"Being stressed about debt is natural – it's the first step to getting it under control,” says Adam Lax, retired chief executive officer of Calyon Australia, who now donates his time helping non-profits and individuals sort out their finances.

Speaking from his professional experience, Lax says "busy women too often let their finances ‘take care of themselves’ or become complacent that their partner is managing things for them even when they are the main breadwinner”.

In fact many Australians, men and women, are in denial about their debts, according to research early in 2015 by Hive Empire’s creditcardfinder.com showing 15 per cent of credit-card holders admit to having a secret card or lying about purchases.

Visit the Australian Securities and Investments Commission's MoneySmart credit card debt clock and you'll see Australians owed around $31.8 billion on their cards in late December. Cardholders had an average card balance of $4325, costing around $728 in annual interest payments.

So if you tend to put your card statements and other bills in the “open later" file or leave things for a partner to sort out, you're not alone.

University of New South Wales senior lecturer Joanne Earl, who specialises in financial and investment psychology, says "women often lack what we term ‘mastery’”.

[That is] the self-belief to act on what they already understand and know they should do. It's not really complacency it's more they feel they can't set the agenda.

As Lax says, "debt isn't always a bad thing but women need to become more debt aware – particularly when their partner arranges the finances”.

Taking simple steps: Emma’s story

It's easy to lose track of all the debt commitments you have, so the first move is to get a complete picture of what you owe: credit cards, store cards, student loans and car loans, personal loans, mortgage etc.

Next, check what those debts are costing you in interest and prioritise the debts you want to clear.

Usually it makes sense to target the highest-interest debt first, though psychologically, clearing smaller debts may be the best first move.

Being stressed about debt is natural it's the first step to getting it under control.

Adam Lax

As a single mother and a professional working in communications, Emma Ford says that simple step to gain clarity in her financial situation was "a relief”.

She had a relatively small outstanding car loan and a couple of credit cards, and one of these had a five-figure outstanding balance.

"I had big card balances and that was beginning to worry me so I listed all my debt: cards and a car loan,” she says. Following this she calculated rent and expenses so she could see what was left.

Emma saw that while interest on her car loan was lower than her credit card – at 11 per cent a year compared with 17 per cent – she had enough savings to clear the car loan and free up the more than $400 a month in repayments.

With this commitment removed and a clear picture of what she owed, she used her extra cash flow to help set up a sizeable monthly direct debit from her salary to pay off the big credit card balance.

Emma also decided one credit card was enough and put a low limit on it. She started using a debit card for regular purchases.

Don’t risk the house

Not being a homeowner, Emma didn't have a mortgage redraw to dip into, but Lax warns this is another area where small debts can add up fast.

A mortgage redraw is both an opportunity and a trap for women wanting to get on top of their debt says Lax: "The temptation is to 'put it on the house', paying off card and other debts from a lower-interest home-loan redraw facility, it makes sense but if you lack discipline it soon makes things worse.”

I had big card balances and that was beginning to worry me…

Emma Ford

It's not always home improvements, travel or restaurant sprees that do the damage. Many women run up debt out of necessity says Michelle Crawford, deputy chief executive officer of Good Shepherd Microfinance.

This Melbourne based not-for-profit organisation offers low-income earners access to no-interest loans for life essentials such as home appliances, computers and education support.

“If you have debt worries, avoid loan-consolidation services and talk to a financial counsellor or your credit provider about a hardship payment plan – don't be too proud or embarrassed,” Crawford suggests.

For information and assistance on debt management visit ASIC MoneySmart or talk to a financial adviser. If you have serious debt stress, talk to your bank about financial hardship assistance.

January 2016