Managing Your Debt

The fact is that most financially successful Australians need to take on considerable debt to build wealth. The best to do this is to take out a mortgage to buy a home. Unlike many short-term products such as cars and computers, a home builds in value or equity. Because compound interest is charged on the mortgage, you should aim to pay off the loan as soon as possible, to save you paying a lot of interest. Consider paying fortnightly instead of monthly to get those extra payments in. Pay as much as you can above the minimum monthly payment, and keep paying if interest rates fall. If they rise you may want to consider refinancing, possibly with a fixed-rate loan, or with a combination of variable and fixed, perhaps 50/50.

Repayments well above what is required can really help you when interests rise. You will be paying these higher rates on a lower capital. An all-in-one account can help. These types of accounts allow you to put all your salary and extra income, such as rent, into the linked loan account. This reduces the amount of interest you need to pay in the future. You can then pay most of your bills and expenses by credit card by taking advantage of the interest free period. You then pay off your credit card in full each month from the all-in-one account.

You can also link a mortgage offset account to your home loan. This allows you to use your normal savings account facilities such as ATMs, cheque book, credit card, and internet or phone banking. As with the all-in-one account, you should use your credit card as much as possible, so that money stays in the offset account as long as possible to reduce the capital of your loan, and consequently, future interest payments. An offset account can also act as a cash reserve, if you run into financial difficulty, although this should only be done in the short-term.

You can also use the equity you have built up in your home. You can use a redraw facility or line of credit loan to pay off your credit card debt within the interest free period, to save on the higher interest of the credit card. You could use the redraw facility to pay off a car loan, which generally has a higher interest rate than a mortgage. Redraw facilities tend have fairly low interest rates and fees. They are mainly suited to low to medium-earners that are not very disciplined with their spending.

Never rely on banks when it comes to all your accounts, loans and credit cards. They can and do make mistakes. Check all statements upon receiving them, and report any unauthorised transactions immediately. This can save you considerable money.

For more information on banking products go to http://www.creditworld.com.au/bank-accounts.html.

Summary

• Manage all your debts as a whole.
• Put as much money into your mortgage as you can afford.
• Pay fortnightly instead of monthly.
• Keeping paying the same amount if interest rates fall.
• Use a mortgage offset account to pay for most expenses with your credit card. Then when the interest-free period has expired, pay the credit card off in full from the offset account. This will also save you interest on your mortgage.
• Check all bank statements carefully for errors and report any unauthorised transactions promptly.
  

Article correct at its author date: Jan 2007. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

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