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Be smart about dumb debt

By Sorted spokesperson
Monday, August 20, 2012
Be smart about dumb debt
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In April this year the Reserve Bank found Kiwis owed $3.6 billion in outstanding credit card balances. At an average interest rate of 17.7%, that means we’re paying somewhere around $638 million in interest every year.

Imagine if rather than paying that money in interest it went towards things we really wanted to spend on – family, friends, ourselves, paying off our mortgages or even saving for our retirement!

At Sorted, we want all Kiwis to avoid dumb debt and to become smarter in the way we use consumer finance. Dumb debt is high-interest debt that can be avoided. It includes credit cards that aren’t paid in full each month, finance deals that go beyond the interest-free period and some car loans.

Borrowing to pay can be smart if it’s managed well. But if not, it can quickly turn into dumb debt. While close to 60% of Kiwis pay off their credit cards in full each month, the rest are paying interest on their purchases.

When it comes to ridding yourself of dumb debt, prevention is the best cure. Before making any decision to take on debt, work out how much it will really cost over time.

For example, if you buy a pair of shoes on your credit card for $280 and only make the minimum payment required, they will cost you more than $350. They aren’t quite the bargain you thought they were when you realise you’ve paid $71 in interest. That’s money that could have gone towards your mortgage, that much-needed holiday, or earned interest in a term deposit. Not only that, but if you just make the minimum payments, those shoes will also take you more than three years to pay off!

The best approach to dumb debt is to pay off as much as you can. When you’ve paid off one debt in full, increase your repayments on the remaining dumb debt.

And while you’re putting all that effort in to paying off your dumb debt, make sure to avoid taking on any more.

Take charge of your debt. New Zealanders shouldn’t be paying $638 million in credit card interest each year. If we all make a few changes, we can get that figure down and be financially better off.

For tips and calculators to help you work out how to rid yourself of dumb debt, go to sorted.org.nz/shrink.

SortedArticle provided by Sorted.org.nz. Sorted is New Zealand’s free independent online money guide, run by the Commission for Financial Literacy and Retirement Income. Sorted has a range of free calculators to help you make financial decisions at sorted.org.nz/calculators.

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