Debt Consolidation, Debt Solution, Debt Relief

GENERATION X, being people aged between 30 and 50 are struggling with debts more than any other sector of the Australian population.  In fact experts are believe that these people can well be renamed to Generation Debt.

A new survey for bank RaboDirect found approximately 40 per cent of Gen X say their financial situation has declined over the past 12 months, one-third don’t have enough emergency money to last more than two months, and one-third regularly only just manage to make it through to their next pay day. These people resort to maxing out credit cards, borrowing from family and friends as well as apply for payday loans to help them survive from payday to payday.

Gen X makes up about 40 per cent of the Australian population, according to the last Census, or about eight million people, which make them an influential group, RaboDirect general manager Greg McAweeney says.

Close to 2.5 million Australians in this age group always feel like they’re behind in payments and are only falling further into debt every month.

Debt recovery company Dun & Bradstreet also says Gen X is weighed down by their high levels of debts.

“For years we have been talking about whether Baby Boomers have been saving enough for their retirements but not enough attention has been paid to the fact that Gen X is carrying more personal debt than any other previous generation at a similar age,” Dun & Bradstreet chief executive Christine Christian says.

“Around 40 per cent of Gen X said they would find it difficult to meet their loan repayments, with a similar proportion reporting they would use their credit card to buy something they otherwise couldn’t afford. Once the credit cards are maxed out borrowers look at debt consolidation to reduce monthly repayments – however often this becomes a never-ending cycle of more debt.

Data from survey company TNS Consultants found 30 to 50-year-olds have a high incidence of home loans and other borrowings compared with other age groups.

“Around 66% have a credit card but in terms of repayments, this group is more likely to just make the minimum payment. This eventually brings their credit card debt into levels they can no longer afford. Given the declining values of property, borrowers who wish to consolidate credit card debt into their mortgage are finding that they either do not have sufficient equity, or sufficient income to be able to do so.

Baby Boomers are the most confident about their finances, the survey found. They know what the current interest rates are and they find dealing with their finances less stressful.

Most people applying for debt consolidation help are looking for a personal loan to consolidate their unsecured debts such as credit cards, store cards, other personal loans etc. However few take the time to consider that their cheapest debt consolidation solution may be to consolidate these debts into their home loan. While debt consolidation into your mortgage will increase the size of your home loan it should reduce your monthly repayments thereby making your current debt level more affordable.

Having said this, debt consolidation into a home loan is not for everyone. First of all you must have sufficient equity in your property to qualify. That means that after you add your current home loan amount together with your unsecured debt amount the overall figure must be notably less than the value of your home. Some people do not understand that you can not consolidate debts into a new home loan with no equity.

Example 1: Property Value :$500,000,

Home Loan balance  $350,000

Other Debts : $50,000.

In this scenario your new mortgage would be $400,000 for a property worth $500,000 – that is an 80% loan and providing your income position is satisfactory, it can be done and should offer savings.

Example 2: Property Value : $500,000

Home Loan   $450,000

Other Debts : $50,000

Here the current mortgage is already at 90%. A refinance beyond that would not be possible. To consolidate unsecured debts into the mortgage, a 100% home loan would be needed – this is not available.

There can be other reasons why debt consolidation into your mortgage may not be possible or cost effective. One such reason would be where your income level has dropped and you can no longer sustain the loans you are holding. even if you have equity in your home, loan affordability determines if this is possible.

Another reason may be that you have acquired defaults since taking out your home loan. Consequently your original home loan may be with a bank at a low rate, whereas debt consolidation will necessitate refinance to a specialist lender at a higher rate, making the new home loan more expensive rather than offering you a saving.

Nonetheless sometimes a mortgage at at a higher interest rate than you are paying today, may still offer the benefit of lower monthly repayments once other debts are consolidated.

According to research company Coredata, many older Australians are concerned about their financial position in retirement. Most expect to continue working.  People do not really understand how to best manage their finances including superannuation.

The survey found 86 per cent of people aged over 55 planned to work part-time or casually after stopping full-time work.

One in three people surveyed said that they could not see a time when they could fully retire and not need to work as least casually or part time, while 39 per cent said they are unlikely to meet their retirement income needs.

The level of income that most people said they would like to have in retirement is $1000 per week

About 22 per cent of people surveyed said they did not know if they were eligible for a government age pension; 39 per cent said they were eligible, and 39 per cent said they did not qualify.

The findings indicate that older Australian require further financial education as well as the assistance of financial planners. As the baby boomer population begins to age, this is a very large proportion of Australians that could benefit from financial planning assistance.

Is debt getting you down? Bills keep piling up? Afraid of bad credit? It is important to get some professional advise to understand your options.

If you feel like your debt situation is getting progressively worse – the first thing to do is cut down your spending.

If what it takes is the shredding of credit cards then this is what you should do. At the very least stop carrying all the cards around with you. You may be surprised to know that credit card use in Australia is actually growing at its slowest pace in more than a year but the average credit card balance in December 2010 was still $3314.

However this does not apply to everyone, and many Australians are still spending more than they can afford.

There is a clear difference between good debt and bad debt. Good Debt is your mortgage or your investment loan – ie. debt that is actually generation an income or equity for the investor. Credit card debts and other lifestyle debts are known as ‘bad debt’ as they do not generate wealth.

Your home loan can be defined as essential debt, not one that you will be able to reduce in a hurry but hopefully one that you are able to afford. While good debt is tax-deductible and includes loans for income-producing investments such as real estate or shares, credit card debt will include your entertainment expenses – nice to have but not essential.

Pay off bad debt such as credit cards first, as they usually have the highest interest rates. If left to spiral out of control, they can cost a person thousands of dollars in interest over many years.

DEBT CONSOLIDATION

If you have several cards that have gone over the limit, it may be cheaper to roll these over to a single secured loan or a low rate credit card.

Remember that consolidating debts only works if your monthly repayments under the new loan are lower than your existing ones.

ESSENTIAL DEBT

Interest rates on secured loans such as home loans are much lower than other unsecured loans, this type of debt should be repaid only after your unsecured debt is paid.

“The most effective way to save interest on your home loan is to make extra repayments each month. Increasing the frequency of your repayments can also reduce interest.

By increasing your repayment just $200 to $2368 a month on a $300,000 loan, with a 7.25 per cent interest rate, you’ll save about $80,600 in interest and have your loan paid off in 20 years instead of 25 years.

DEBT AGREEMENTS

Debt Agreements are not an easy way out. They are a milder form of bankruptcy and should only be considered where no other solution is available.

BALANCE TRANSFER CREDIT CARD

If you’re like the majority, your card balance will be in desperate need of reduction.

Remember that lenders will first apply payment to the initial balance of a balance transfer credit card, rather than the new spending which attracts a higher interest rate.

As a general rule, you need to know the promotional rate, when it expires but more importantly the rate you’ll pay after expiration. You MUST NOT use your balance transfer card for further purchasing.

According to a recent survey by Mortgage Choice, almost twenty percent of recent homebuyers are carrying unsustainable levels of debt - some as much as $100,000 in addition to their mortgage.

Some of this extra debt has gone on to their credit cards, some into home renovation and some into the purchase of a car.

Many people breathe a sigh of relief once they get their home loan approved and some begin to take on additional obligations which they can ill afford.

The number of people saying they had accumulated significant extra debt was 15 per cent higher than a year ago, with 45 per cent saying they had spent more than $20,000.

Five per cent added more than $100,000 within the first two years of home ownership.

Eight per cent of the 803 people surveyed said they may need to sell their home as they are not able to afford all their debt obligations.

The same number said they would consider selling up if interest rates went up by one percentage point.

The two biggest issues for 2011 were rising interest rates (47 per cent) and cost of living, such as utility bills and clothing (24 per cent).

The main concerns were being committed to large financial commitment for so long (48 per cent), followed closely by not being able to afford repayments (46 per cent).

Despite these concerns, only 29 per cent of respondents had mortgage protection insurance, 28 per cent income protection issuance and 32 per cent life insurance.

While most of the people surveyed have only had their home loan for two years or less, 28% did not know what interest rate they were paying on their mortgage.

If you are permanently juggling credit card bills, increasing card balances, opening new credit cards to transfer balances from old – you need to STOP NOW!

Credit Card use can be very addictive. If you are someone who has a history of credit card misuse, it is important to solve the problem rather than just address the symptom.

It is important to start by reducing the number of cards you currently hold. Debt consolidation can offer such a solution. Consolidate all other cards into one and then start by working on reducing your debt balance.

Remember that Reward Programs are there to entice you to spend more, rather than give you something for nothing.  Therefore it is best to concentrate on the cheapest credit card not one with all the bells and whistles.

According to Dun & Bradstreet (D&B) debt research data, 38 percent of women are paying their bills on credit. This has increased by 3 percentage points year-on-year (comparing 12 months to September 2010) in contrast with men’s 1 percentage point rise.

This means that not only are we relying on our cards more heavily for the occasional big spend, but we’re guaranteeing ourselves higher debt with each monthly bill. Unless you are someone who clears your debt balances off credit cards at the end of each month – such spending habits are dangerous and not for you.

If you have a home with equity, do yourself a favor and consolidate your credit card debt into your mortgage. While the mortgage balance will increase somewhat , your monthly repayments should drop significantly.

If you still crave for a card you can carry in your wallet – take on a debit card. This will prevent you from spending money you do not have.

One in five women will be applying for a new credit card in the coming months, D&B found, so if you do find yourself comparing rates for a new lifestyle, make it count by remembering why you promised yourself to quit the bad habits this year.

The Insolvency and Trustee Service Australia provides information for those with unmanageable debt.  If you are not a property owner and are finding that you simply can not meet your monthly unsecured debt obligations – a debt agreement may be the solution for you. These agreements are regulated by Government and offer debt relief to those considering bankruptcy.

AUSTRALIAN households are trying to minimize the use of credit cards, in an effort to eliminate debt collected on plastic by more than 10 per cent and reducing the number of cards they own.

The average Australian family has reduced credit card debt by 14 per cent and trimmed their cards from 2.1 in the third quarter of 2010 to 1.9 in the fourth quarter.

Victorians were the leaders in debt reduction by cutting 25 per cent off their quarterly credit card balance from $2286 to $1724.

Households in New South Wales followed closely, reducing credit card debt by 21 per cent from $2103 to $1651.

South Australia was the only state where households had gone against the trend and actually accumulated more credit card debt during the quarter by a whopping 151 per cent with spending up from from $699 to $1760.

The November interest rate increases had put the fear into many families with already high credit card balances.

Households in all states either reduced the number of cards they own or maintained the same level. NSW households cut back credit cards from 2.1 in the third quarter to 1.8 in the fourth, while Victoria was down from 2.2 to 2 and Queensland 2 to 1.8.

One in four households are saving more than they did prior to the GFC and only 17 per cent are spending as much as they did prior to it.

Nationally, median savings were up from $8912 in the third quarter to $9238 – a 4 per cent rise.

WA achieved the best results with savings – the average household increasing savings by 73 per cent from $9327 to $16,107.

It is clear that Aussies are becoming more financially aware.

Now that the festivities are over you have probably accumulated a few more pounds and a significantly larger debt balance.  Like many other Australians  you are probably tired of Robbing Peter To Pay Paul and are looking for some more durable debt elimination solutions.

Here are some steps that you can take immediately to improve your financial position:

1. Budget, Budget, Budget. Document all your ongoing obligations, your living costs, mortgage repayments, credit card debts etc, as well as all your sources of income. Try and work out a payment schedule that allows you to cover all your debts and leaves a little extra to reduce obligations. If you genuinely wish to improve your situation – if it is not in the budget Do not purchase it……
2. Awareness of available options . Keep up-to-date with the latest home loan products advertised, as well as offers to roll-over credit card debts into a low interest card for a few months or a year. Some of these can really help reduce monthly repayment obligations.
3. Direct  surplus funds into the debt accounts starting with the one that charges the most interest while maintaining minimum payments on other accounts. For example if your credit card interest rate is 17% and your store card has a rate of 13%, direct minimum payment to the store card and surplus funds to the credit card – this will save the interest paid at a higher rate.
4. A higher income should not mean higher living costs even if you are lucky enough to receive a pay rise – that way you can use the extra funds towards savings or your mortgage.
5. Make larger than the minimum set payments if you are able to do so. Get ahead of any future rate rises and fix your repayments on a higher rate now as if the rate were 1-1.5% higher. This enables you to pay your home loan off quicker and save a lot of money in interest before any rate rises and thus get ahead while rates are unchanged.
6. Set your Mortgage to fortnightly repayments. Set your repayments fortnightly instead of monthly, as you will then be making 26 payments in a year rather than 24. This in turn will save you interest costs and reduce the term of your loan.
   For example, if you have $250,000 loan for 30 years at 7.82%, a fortnightly repayment will save you $114,926.11 and reduces the loan term by seven years and three years over the life of the loan.
7. Move your debt to a cheaper credit card. Switch to a low interest card and choose one without annual fees or transfer fees. If you have $1,000 in your credit card at 15% interest, switching to a lower interest card at say 8.9% with no annual fee will save you more than $800 on interest and fees each year. If you put that saving in your mortgage you will cut your 30-year $250,000 loan by three years and eight months and save more than $58,000 on interest.
8. Stop buying lunch-bring it from home. Bringing your lunch from home more often in the working week and putting the savings made into your mortgage can significantly reduce your interest payment and the term of your loan.
9. Eat at home more. We all love the take-away meal and seem to eat them on a regular basis. If you were to give up one super-sized take away meal a week, say $7, and pay it off your home loan you would save nearly $25,000 and also about two years off your loan, plus imagine how good you will look. Home cooked meals are healthier for you as well as for your wallet.

According to the Real Estate Institute of Australia, we have suffered the largest annual decline in housing affordability since the beginning of this century.

The REIA Deposit Power Housing Affordability Report released yesterday, has revealed that over the September quarter, the total number of loans (excluding refinancing) was down 2.9 per cent to 101,364. Housing affordability has also fallen by 0.2 percentage points nationally in the September quarter.

Meanwhile, over the year, the total number of loans written fell by 28.3 per cent – the largest annual decline in Australia since March 2001, according to the report.

The proportion of income required to meet loan repayments increased 5.8 percentage points over the year to be 34.8 per cent.

We have not seen such low levels of housing affordability in a long time. Unfortunately it is not all related to real estate prices – much is to do with the current levels of interest rates and the costs of mortgages.

“Compared to the same quarter of the previous year, all states and territories recorded a decline in housing affordability.

“The largest drops in housing affordability were in New South Wales and Victoria where the percentage of income required to meet loan repayments increased 6.5 and 7.5 percentage points respectively,” Mr Airey said.

Keith Levy, national manager of Deposit Power, said there had been reduced sales from property investors in the last quarter, as many purchasers appeared to be taking a ‘wait and see’ approach.