Paying Out Where Credit's Due It's On The Cards
Sydney Morning Herald
Saturday May 20, 2000
Worried about rising interest rates? Financial counsellors say now is the time for consumers to be reassessing their spending patterns and borrowings.
Given the likelihood this week's half a percentage point lift in United States interest rates will put further pressure on local rates, the advisors say we should be looking at the borrowings we built up during the good times and planning for tougher times ahead.
``When you have a boom like we've had over the last couple of years, a lot of people find they have spent money on things they can't really justify borrowing for now," said the general manager of the Resources Credit Union, Oleg Rozmeta. ``The other issue is people's ability to manage multiple loans."
While much of the focus has been on home loans, counsellors, and even the Reserve Bank, have been casting a wary eye over the boom in consumer credit.
The latest Reserve Bank figures show consumer credit such as credit cards, personal loans and personal overdrafts grew by more than 17 per cent in the year to the end of March.
The problem is consumer credit is largely what financial planners call ``bad" or ``lazy" debt. Unlike your home loan, consumer credit is money being used to fund purchases that can only fall in value. So you're getting no reward for those interest costs.
As consumer credit generally carries higher interest rates than ``good" debts such as home loans, it's also the first area that should be targeted to protect yourself from rising interest rates.
Make a list of all your loans, what you borrowed the money for, and the current interest rates, Mr Rozmeta suggested. That will give you an idea of where you are overstretched and where you can start repaying the loans faster.
Narelle Brown, of Ryde-Eastwood Financial Counselling Services, said attention should be paid to credit card debts that aren't being repaid in full each month especially if you are using the money for daily living expenses such as buying the groceries.
Most Australians use cards with up to 55 ``interest-free" days. But if you don't repay in full each month, you may be better off with a card that has no interest-free period, but a lower interest rate.
If you've accumulated more than a couple of credit cards, Ms Brown suggested, it would be worth amalgamating them into the one with the lowest interest rate and fees.
Debt consolidation might also be an option, Ms Brown said.
This means refinancing all your debts into one cheaper package such as a personal loan, or adding them to your home loan.
``But you can't consolidate your debts and then keep spending on your credit cards," Ms Brown said.
Mr Rozmeta said another danger with debt consolidation particularly if you added the borrowings to your home loan was that while your repayments would be lower, you might take longer to pay your debts off, increasing your total interest bill.
``You've got to commit to paying the debts off if you consolidate them," he said. ``Do you really want to be paying off your overseas trip or your car over 25 years?"
Another trap is the recent proliferation of ``interest-free" purchase offers. Ms Brown said many purchasers don't realise that if their payment is even one day late, they may be charged interest for the entire period often at rates of 16 to 20 per cent.
If you can't afford the purchase now, it may be better to save the money over the ``interest-free" period, shop around, and when you have the money to buy, ask for a better deal for paying cash.
But Ms Brown warned borrowers shouldn't let their ``good debts" slide, while concentrating on consumer credit. If you can afford it, she suggested, increase your mortgage repayments or consider whether you need a fixed-rate loan.
With Reserve Bank figures showing an increase in margin lending over the past year, it may be time too to review borrowings for share purchases and to ask whether the shares are likely to grow sufficiently to justify the interest costs.
© 2000 Sydney Morning Herald
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