With some planning, you can manage the darker side of personal debt

Everything that sparkles has a darker side to it and personal debt is no exception to this general rule. Debt is one of the most powerful tools of modern times to manage one’s personal finance, but it can soon turn into a vicious circle forcing you to a situation where you can find yourself at the end of the road not knowing how to get out of liabilities you have created over the years. In the worst case scenario, you are stuck with the syndrome of borrowing for the purpose of repaying an existing loan, even at a high cost or interest rate. Yet, there are certain simple ground rules you can follow to avoid getting close to such a helpless condition.

First thing that you have to carefully decide is which loan should be repaid first if you are finding your repayment liabilities much greater than what you can easily handle each month with your pay check and other sources of regular income. Your bad credit debts, such as credit card loans and high interest personal loans should be taken care first as these do not qualify for any tax deductions. So, the first principle that you need to follw is to pay off your debts of this kind that charge a very high interest rate.

After you have removed your high interest loans, or have reduced them to a level where it is not difficult to control month by month, the next segment that you need to address is your home loan. You can thinks of various options to reduce your mortgage costs, such as reducing the length of loan, increasing the frequency of repayment or making occasional payment off the principal amount whenever you have got spare cash.

Interest-free financing appears to be quite an attractive option to many these days. But you have to keep in mind that nothing comes for free, and there are often some fine prints in such offers that most people ignore. Most such offers come with the condition, in fine prints of course, that if the payment is not made within the interest-free period, then the interest rate charged is quite high and is charged on the original amount outstanding irrespective of what has already been paid.

Consolidating your existing loans is another option that has many positive sides to it. The interest rates charged on such consolidated loans is often quite less, and it also has the advantage of not carrying the burden of keeping track of loans from different sources and making timely repayment for each.

It is advisable not to keep too many credit cards as there are more chances of missing making a timely payment on one or the other if you are carrying too many. Ask for a small credit limit so as to keep your high interest credit card debts under check. In fact, the recent trend is people using more of their own funds through debit cards than using the credit cards for most of their regular purchases. These simple and basic rules appear to be quite obvious, but are generally not followed when it comes to managing their personal finances. However, this approach can go a long way in helping you keep yourself out of a lethal debt trap kind of situation.

Credit card is no substitute to personal loan

There are about 12 million credit cards in the wallet of Australians having an outstanding debt of more than $40 billion. Credit card companies charge higher interest rate in comparison to rate applicable on a personal loan. Yet, credit card is an immensely popular device, seen by many as the most convenient option to withdraw large amount of cash in emergency.

The greatest advantage of credit card is the flexibility of its use, and this is the reason why people prefer using it most of the time when they are in need of urgent cash or they have to make some big purchase. However, because of the high interest rate charged by the credit card companies, there is always the danger of falling into the vicious circle of debt trap. You need to spend judiciously with your credit card – if you don’t know how to stay within budget, you better stay away from these cards.

When you are selecting a credit card, you have to consider a few things, such as interest rate charged on cash advances and outstanding balances in addition to the interest free period. If you are making your payments regularly every month and not keeping any outstanding balance on the card, you should naturally choose one that gives you longest interest free period. However, if you are not paying the entire outstanding balance at the end of every month, you will be better off choosing a card that charges lower interest rate even if it gives low interest free period.

Personal loan offers a number of advantages in comparison to credit cards. First of all, it can help you stretch your repayment schedule over a long period without paying too much on interest charges. At times, they can be used to consolidate your credit card loans at a much cheaper interest rate, if you are thinking of cutting your credit card dues. Sometimes, there are some merchant fees on big purchases and you end up paying a lot more than the price applicable for cash purchase, and in those situations, you may think of taking a personal loan and paying by cash rather than paying through credit card.  This way you are also discouraged from impulse buying, which is quite a big problem for people who are carrying credit card in their wallet that gives them a false confidence of having enough surplus cash.

Lowering of debt rate in Australia is due to global economic recession

The current economic recession that has gripped the entire globe is proving to be too long and severe. With people in constant threat of losing their job, they are cutting down on their debt drastically. The personal credit growth in Australia in recent times has fallen to a level last witnessed at the time of 1991-92 recession and is shrinking continuously for the past eight months. The level of personal borrowings that includes credit cards, personal loans and margin loan has also gone down by 0.2% in January 2009.

The famous economists Savanth Sebastian feels that the present economic downturn is being seen by people as the perfect time to clear off all previous debts. People have almost stopped taking debt so they are not burdened to repay the present debt in the event of a job loss that looks a real possibility in the scenario of weakening global economy. They are increasingly getting concerned about the worsening economic situation and spending their money in paying off all the piled up debts as far as possible and getting control over their household budget. There is a drastic rise of 22.2 per cent in repayment on credit cards due during December 2008. This is the largest monthly increase in terms of percentage in credit card payments since May 2006. The credit card loans have also increased in recent times at the rate of 3 percent per year, which is the slowest ever recorded.
The scenario of economic slowdown still appears to be quite gloomy and there are reports of unemployment levels rising in the next two years. As per the federal government, the forecast of unemployment rate in June 2010 was recently upwardly revised to seven percent as compared to the government’s figure of 4.9 percent given in January 2009. This revision translates into a huge number of Australians getting unemployed by next year, almost close to 250,000 new Australians adding to the list of those who were unemployed and hence estimated to apply for unemployment benefits.
Such a gloomy picture of the economy is taking its toll on the debt scenario in Australia in a big way, and there is a general concern to get rid off the existing liabilities created by earlier debts as early as possible to survive the rough phase in the economy that is not showing signs of improvement even after one year since things started turning red. A gloomy picture on the horizon is having a negative impact on the consumers in general and people are thinking twice before spending big money. It is definitely going to affect the performance of companies involved in manufacturing consumer goods and products because of shrinking demand in the market.