So, you’ve just been approved for an exciting new loan. Goodbye instant noodles, hello holiday mode. Whether you’re in the market for a new car or just need some cashflow to see you through a tight squeeze, it’s important to keep a cool head before you start making it rain.
The joy of seeing all those zeroes in your bank account can very quickly become a pit in your stomach when the time comes to make good on your payments.
If this is already giving you anxiety, it might be time for “the talk.”
Let’s talk about debt, baby.
Q1: What is debt?
In the simplest terms, debt represents what you owe. If somebody gives you credit in the form of a loan, the money you owe back to them is your debt.
A primary factor in calculating debt is interest, which is represented as a percentage of your total loan amount. Essentially, it’s the cost of borrowing money, which explainswhy most of us have zero interest in paying it.
Two things to note about interest when borrowing:
The interest rate. That percentage we just spoke about? That’s how much you’ll be charged to borrow money.
Compound interest. This is when you’re charged interest on the interest you already oweon top of the original loan amount . If it sounds like debt Inception it’s because that is exactly what it is.
Types of debt
We reckon you'll know debt when you see it. Loans are a super common form of debt and usually come in the way of money to buy things like a new car or home. HECS or HELP is another common type of debt, as are credit cards.
Debt can generally be classified into two buckets – secured and unsecured. Secured debt means an asset of yours acts as security in case you're unable to honour your agreement. Unsecured debt means that is not the case.
Just 'cause we like ya, you can have a peek at our Smart Guide to Unsecured vs. Secured Loans for more info about those two buckets.
Q2: What is “bad” debt?
"Bad" debt is money you borrow for reasons that are – let's say – less than essential. While it might help you have a bit more fun in the short term, it's not going to help you make more money in the long term.
Perhaps the most common form of bad debt is credit cards. They're considered bad because:
It's easy to whip them out which can lead to unhealthy spending habits.
Higher interest rates can mean you end up paying for a lot more than what you spend.
They are forms of revolving credit, which means they can keep coming back again and again, especially if you are unable to make repayments on time.
They can hurt your credit score. Having too many open lines of credit can give lenders the heebie jeebies.
Q3: What is "good" debt?
For many people debt is not super fun. But there is such a thing as "good" debt.
Some debt can be considered good because it can help you make even more money in the future. It's that whole "gotta spend money to make money" line of thinking.
Loans that help you finish school, start a business or get into the property market can be considered good debt. A lot of times debt is also considered good if it comes with lower fees.
How to tackle your debt
Debt can be an overwhelming burden that affects your social and professional lives, relationships and your mental wellbeing. Start by putting your device down, splashing a bit of cold water on your face and giving yourself a pep talk.
Here are some tips to help knock down debt.
Make a plan. Writing things down can make them easier to manage. Prioritise the debts with the most interest – often those nasty credit cards we spoke about earlier. That way you won't get hit with as much compounding action.
Bite the bullet. Like going to the dentist, your to-do list at work, or getting back into running, there's nothing to it but to do it. When it comes to debt, that means upping monthly repayments if possible. By increasing your payments, you may chip into the principal and also lessen the interest.
Don't talk about it. Bottomless brunch and your five different streaming subscriptions might have to go, but it’s worth the peace of mind, trust us. There are some essentials you can't afford to cut, so you have to be ruthless in trimming the "nice-to-haves."
Q4: What is debt consolidation?
This is another awesome way to get your debt into shape. Consolidating your debt is when you wrap all your different debts into one simple payment. It's easier to understand and keep track of and can cut down on admin and associated fees big time. Benefits of debt consolidation include:
Your secret weapon in the fight against debt
In addition to consolidating your debt, you can chip away at it every time you make a purchase with the help of Round Up feature. With our handy app, you can round your purchases up to the nearest dollar, with that loose change going toward paying off what you owe. Be the change you want to see in your debt.
Disclaimer: This article contains general information only, and is not general advice or personal advice. Wisr Services does not recommend any product or service discussed in this article. You must get your own financial, taxation, or legal advice, and understand any risks before considering whether a product or service discussed in this article may be appropriate for you. We have taken reasonable efforts to ensure that the information is accurate at the time of publishing, but the information is subject to change. We may not update the article to reflect any change.