Learning how to navigate all the financial tools at your disposal can be overwhelming and, in some cases, very much done by trial and error. When it comes to instruments of debt, it’s better to be safe than sorry, so do your due diligence when faced with debt decisions. At Forward360, we know how debt can be part of an overall healthy financial picture – but not all debt. It only takes one bad apple to spoil the bunch, so we want to make sure you’re wary of the very worst debt decisions out there, just waiting to be made.
Debtly Sin #1: Credit Cards Used Poorly
Credit cards can be wonderful. If you use them when you don’t need them, you can collect points, cashback and all sorts of perks. Because you weren’t short on cash in the first place, you pay them off each month, and it’s a great deal. They’re also not a terrible way to give yourself a bit of extra cash during the month when you know you can pay it off. However, if you’re living off credit cards, you’re getting into big trouble.
• Here are all the ways your credit card relationship can be bad:
• Late payment fees are often over $39.
• If you go over your limit by even a dollar, you’ll get hit with a high fee.
• Cash advance fees run up to 4 per cent of the advanced amount.
• Annual fees can be $400 or more.
Where you get into real trouble is in the interest rate. If you’re even a day late, your low rate can go up to nearly 30 per cent. Some companies will even raise your rate if you default on other accounts.
Solution – don’t use them unless you can absolutely pay them off and only use them in ways that won’t trigger a fee.
• Set up a direct debit to make sure they’re paid off at the end of each month so it doesn’t trigger high interest.
Just think of these loans as very expensive, very short-term credit. Very expensive. Use this as an example. You write a check to the payday loan lender for $240 so you can borrow $200 for fourteen days. The payday lender deposits your check into their account on your next payday. If you don’t have enough to pay them back, you can roll it for another two weeks – without receiving any more money – and it will cost you another $40. Do that one more time and pay another $40. Six weeks later, you’ve paid $120 to borrow $200. Do you know what that adds up to? A terrible deal.
Also called rent-to-buy, this is a program where you rent a home and a part of your rent goes toward the down payment on that house. You’ll usually pay more than local rental rates, but your money is going toward your future, right? Not really. We know the housing market is a tough thing to break into, but this way has you paying higher rent with an option to buy the house at another inflated price. You’ll likely need to save 3 per cent to go towards the purchase before you can pull the trigger.
• We think it’s a much better idea to live below your means so you can save for your own down payment at a fair market price. The same is true of rent-to-own anything else, such as furniture or appliances – you’ll spend far more than the item is worth.
Debtly Sin #4: Home Equity Loans
This can seem so appealing. These loans are often offered at pretty low rates if you’ve got good credit, and, hey, it’s your equity, right? It is, but only if you don’t get a loan. Once you get a loan on that equity, it belongs to the bank until you pay it back. If you miss a few payments, you could lose your home.
• If you decide to get a home equity loan be very mindful of what you will be using this money for. Its easy to get trapped by buying a new car, furniture, etc against your equity which will be paid over a long period of time and cost far more in the long run, however if you borrow against your equity to get into a sound investment opportunity that is cash positive then this is the smarter way to leverage yourself into wealth. Like all investments you need sound financial advice.
• Make sure that you choose a fixed rate over a variable rate so that you don’t get caught out with rising interest rates
Debtly Sin #5: Leasing
A consumer lease is essentially renting something, under contract, for a certain amount of time, usually one to four years. You make regular payments until the lease is up. It seems like a great idea because the payments are often lower than they would be if you were buying. What many consumers don’t take too detailed a look at is what they will pay in total over the life of the lease.
In some cases, people who lease things like a washer or dryer for two years will end up paying more than five times the retail price of the appliance.
• It’s always a better option to make do with a sub-par appliance, piece of furniture, car or whatever it is and save for an upgrade.
Debtly Sin #6: Afterpay/ZIP pay
We’re finding a lot of people getting themselves caught out with the instant gratification of leaving the shop with their purchase with the obligation to then pay it back over a set period of time. Most often people are then juggling their finances to meet those commitments and more often than not are paying high fees from defaulting on these payments pending how many items have accrued.
• It’s much better to save the money and buy the item outright than getting caught chasing short term pleasure with medium term pain
Debtly Sin #7: Credit “Fixers”
There are those companies that claim to be able to fix your credit if you’ve gotten into trouble. They charge big fees for negotiating with the credit reporting agencies to lower your payments and reduce the negative impact on your personal credit. They claim to be able to get things such as missed and late payments or defaulted accounts removed from your report.
Did we mention the fees are big? It can be thousands of dollars upfront and then a high monthly fee to continue “working” on your credit.
• Here’s the big secret – they can’t do anything for you that you can’t do yourself. You can contest any errors you see on your report by contacting the agency directly. You can’t have anything taken off your report if it’s true anyway, and the very best way to improve your credit rating is to pay all your debt off and on time.
Debtly Sin #8: Unnecessary Purchases
If you added up all the money you’ve spent on things you not only didn’t need but maybe didn’t even want a week or two after buying, we’re guessing you’d be able to pay off quite a bit of debt or, even better, actually put some money into savings.
There are a few good practices to make sure you’re not buying things unnecessarily:
• Sleep on it! If you’re buying something over $50 that isn’t an absolute necessity, wait a day. You’ll be surprised how many things you can live without. Just ask the question, “Do I need this?” and if the answer is “No,” leave it behind.
• Save up for a splurge. We get into debt because purchasing things on credit is just so easy and gives us instant gratification. If you put it off until you can afford it, you get to enjoy it without paying double or triple for it by putting it on a card.
Do You Have a Financial Plan?
Now you know what debt traps to look out for and the solutions to go with them, you can avoid making some big mistakes. But how is your overall financial picture? At Forward360, we have a dedicated team of financial advisors ready to help you with all your financial goals. We can set you up with a financial advisor that will create a relationship with you so they can support you no matter where you are on your financial journey.
We’ll help you get on track to financial independence so you can stop worrying about how to make more money. We’ll collaborate with you to build a financial plan specifically addressing your unique situation. We specialise in providing goal-based advice, so each step we take is one step closer to your goals. Request your free consultation today and get on the road to financial freedom.
Co-founder and Managing Director at Forward360. Simon ensures all clients get the financial advice they need to reach and exceed their financial goals — both personally and professionally.
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