Regional Manager Kevin Buckley has a “fatherly chat” with newlyweds about avoiding the debt trap.
5 tips for escaping the debt trap
- · Save a deposit for your home
- · Borrow within your means
- · Pay credit cards off in full each month or use a debit card
- · Consolidate card debt into other loans
- · Make extra loan repayments.
Being in debt is not necessarily a bad thing. Taking out a loan is usually the way we get to have a car or a house before we are old and grey.
Debt is a trap when you are in over your head. The big debt traps for young people are credit cards and loans. (Mobile phones are another trap but that is a subject for another day.)
I know that when you first start out you want to have the perfect wedding and the best house but nothing tests a new relationship more than issues about money. (I’ve been married for 26 years so I’m speaking from experience here!) If you are living above your means and you temporarily lose your job or get injured playing sport, what then?
A good general rule is to be aware of buy now pay later. That includes credit cards.
Credit cards are a very safe, convenient way to make purchases, including on-line. They are increasingly necessary for some purchases and can give you up to 55 days interest free money. But, if you are not paying off the amount in full each month, you can be paying an interest rate that is more than double a personal loan or home loan. The average credit card interest rate is around 20 per cent.
Using your credit card for cash advances is a big trap too because you pay interest from the moment the cash is withdrawn.
If you struggle to keep your credit or store charge card under control, there are cards that act like a credit card but are much cheaper to operate. A debit card gives you the advantage of a credit card but you use your own money. Some have the added bonus of no monthly account fees too.
With any loan it always pays to read the fine print. Know the interest rate and use one of the many online calculators to work out whether you can afford the repayments. Make sure you check out all the fees that apply too.
If you take out a “honeymoon” or a fixed rate loan, ask what rate the loan will change to so you don’t end up with much higher repayments than you expected.
Paying off more than your required repayments when you can gives you some breathing space if for some reason and can’t make a repayment. It will also mean you pay off your loan sooner.
They sound great, but avoid no deposit loans. Having a deposit can help you to negotiate a better interest rate. Open up a high interest online savings account, separate from your normal account and automatically divert a set amount each month into that account. It will teach you the discipline of making repayments and make you some cash while your searching for your dream car or apartment.
The other way to stay out of the debt trap is to talk to other people. Talk to a money-wise friend or family member or the branch manager of your financial institution – someone who has had experience with loans and debt.
It is important to start your married life off on the right foot without having financial pressures that will ultimately put pressure on your relationship.
This blog has been written from an article Kevin originally wrote for White Magazine