Once you take that first step, then the second step and so forth, you get into a routine of reducing and getting rid of your unwanted debt.
Which debt to pay first?
The key to success in managing your finance (especially for property investors) is to find ways to minimise your bad debt and maximise your good debt. For example, whilst you have bad debt, you should only be making interest only repayments on your good debt and redirecting all of your extra cash towards your bad debt. You should pay off the more expensive bad debt first (credit cards and personal loans before your mortgage), and where possible look for ways of getting rid of personal debt by consolidating it into your home loan to reduce your interest expense from 15-20% down to much lower home loan interest rates. If you’re a property investor and would like to learn more about we can help you, click here.
Where to start?
Once you finally free yourself of bad debt, you’ll love what follows! You’ll have less stress, more cash flow, better control of your money, you’ll feel more in control of how you’re managing your money day to day, and, you’ll also free up your borrowing capacity.
Here are our 5 tips to help you get rid of unwanted debt:
Tip #1 – Make a list
List all your debt in order of the highest interest rates to the lowest interest rates. Choose the debt that has the highest interest rate and eliminate that one as soon as possible. This means that with all your other debts, you are going to pay the minimum repayments and transfer all your extra money onto the one that you’re focusing on.
Tip #2 – Consolidate all your bad debts
If you can, speak to your mortgage broker, look at your credit cards and your personal loans, and see if you’re able to consolidate them into one facility at a much cheaper interest rate.
This is going to help you get on top of that debt faster, and make sure that you can get rid of it as soon as possible. In terms of looking at this, also call your creditors, and ask them if they are willing to accept a reduced pay-out, if you can pay them out quickly. Often, they’re willing to do this, and this can also help you get rid of your unwanted debt quicker.
Tip #3 – Implement the 50/50 rule
The 50/50 rule is where 50% of your income is going towards your day-to-day living expenses, the other 50% of your income is going towards all your debt repayments, and making sure that you’re transferring most of that income to the debt that you’re trying to eliminate. Also, look for ways to increase your regular contributions to your debt. For example, you might have some lump sum bonuses through work that you can put into there, or tax refunds. Try and get it down as quickly as you can.
Tip #4 – Identify the cause
This is about reducing unnecessary spending. It’s important that if you’re going through this process of reducing and getting rid of unwanted debt, that you’re changing the habits that got you to this position in the first place. Once you actually start to see your debts reducing, and you start to see your money habits changing, you’ll be so excited and you’ll want to keep doing it, and keep improving your money habits, and it will definitely be worth it in the end.
Tip #5 – Celebrate your success
It can be a long journey when you start paying down your debt and getting rid of some of that unwanted debt. So, make sure you reward yourself, and know how you’re going to reward yourself. It’s a big deal and you should be proud of yourself. As you start to eliminate those unwanted debts one-by-one, start reallocating that money that you’ve been putting to that first unwanted debt on your list, to the second unwanted debt until eventually, they’re all gone.
When does debt impact your credit score?
The amount of debt you have may not have a direct impact on your credit score, but your ability to pay it off does!
Some of the factors that contribute to your credit score include:
- Number of credit enquiries – Many people do not realise that every time they apply for finance an enquiry is permanently lodged on their credit report. This is also the case for purchasing things on interest free terms, applying for personal loans and credit cards or doing credit card transfers. Most credit scoring systems are harsh to applicants with many recent enquiries and enquiries relating to personal debt, including purchasing items with interest free terms, and tend to result in lower credit scores.
- Credit history – Especially if there have been any previous defaults, court judgements, bankruptcies, etc. Sometimes, damaging items can be removed with the help of credit repair specialists and this is worth exploring if your credit history is stopping you from moving forward.
- Net assets you have accumulated – Many credit scoring systems will rank your net worth against your age and income to develop a picture of whether you are a spender, saver or investor and this will play a contributing factor towards your credit score. For example, an applicant in their early 40s earning $400K per year with little assets to show may have a credit score lower than an applicant in their early 40s earning $50K per year with a house plus a couple of investment properties and savings.
To ensure you maintain a strong credit score we recommend the following:
- Ensure you are meeting all your financial commitments on time every time.
- Do not apply for personal loans/car loans (if you can avoid it).
- Pay credit card debt in full every month. If you are finding this difficult, then you may be spending more than you can afford. If you are serious about getting ahead financially cut up your credit cards, focus on paying down any accumulated debt and try and adjust your daily spending to eliminate your reliance on your credit cards.
- Do not buy items on interest-free terms.
- If you are submitting an application, include as much detail as possible in your loan application – e.g. at least two phone numbers, email addresses, account numbers of credit cards, personal loans, savings accounts and other housing loans, previous addresses and employers, details of nearest relative not living with you etc.
- Do not apply for personal loans/car loans (if you can avoid it).
- Do not submit a loan application that you are not certain will be approved. Make sure you are working with a reputable mortgage broker who has pre-ordered the valuations, done his/her research for your scenario, and is confident of approval before the loan application is submitted.
- Do not apply for pre-approvals with more than one lender.
Getting rid of unwanted debt can take time but it is worth it in the end and puts you on the path to achieving your financial dreams and goals. Considering alternatives such as refinancing or debt-consolidation can also help!
If you would like help getting rid of your unwanted debt or getting ahead financially, fill out your details below.