As consumers, we're often distracted by our internal debate between desire and necessity. This is something most Australians struggle with daily. Typically, when we see something we want, we'll buy it, often ignoring questions of practicality or necessity. When we break something, we’ll replace it before seeking to repair it. We succumb to the drive instilled in us by sophisticated marketing campaigns, purchasing based on perception rather than reality. This habitual behaviour unfortunately can lead some of us down a path of living beyond our limits, often exceeding our income, resulting in unsecured lending like credit cards and personal loans.
While regulations have tightened up with Home and Investment Loans, unsecured lending has been allowed to flourish with far fewer restrictions.
I pose this question to you - when was the last time you received a credit card application in the mail or an email invitation to increase your limits? I'd be surprised if you didn't receive one in the last month.
The statistics tell the tale
The Bureau of Statistic states that household debt has consistently grown 10% p.a. over the past 20 years with the debt level now standing at over two trillion dollars. Rising household debt has been only partly matched by the increase in the value of household assets.
Over the past 25 years, household debt has increased nearly two times as fast as the value of household assets and 1.8 times the amount of gross disposable income.
All these findings suggest that Australians are too comfortable when applying for debt, but may not be comfortable holding it. AFSA’s (Australian Financial Security Authority) most recent annual findings show that the number of personal insolvencies increased by 4.4% in 2015–16, compared to 2014–15, the first increase since 2008 – 09.
How do we stop this vicious cycle from continuing?
There are a number of ways to ensure you don’t fall into this situation while empowering you to make intelligent and well informed financial decisions. These include:
● Assessing and fully understanding your spending ‘needs’
● Identifying poor spending habits and developing strategies to minimise unnecessary purchases
● Completing a budget or reverse budget and successfully adhering to it
● Conducting regular financial health checks
● Considering a credit card balance transfer and ensuring that the structured repayments repay the total debt within the interest free period
● Converting your credit card to a debit Mastercard/Visa to ensure you remove all temptations
● Avoid adding your credit card debt to your mortgage and cancel your existing credit facilities until the new consolidated debt has been fully repaid.
Most importantly, if you feel like your debt is getting out of control, or you would like to review your current situation further, we encourage you to speak to your local lending adviser. They will be able to review your situation and provide you with professional advice to ensure you are appropriately positioned to eliminate not just your debt, but the decision-making processes that lead to it.
For any more information or assistance, please don’t hesitate to contact your local adviser today.