How to make smart decisions about debt
Debt is anything you owe to someone else. So, if you borrow money, you have debt. Debt can range from your home loan to buy now pay later services and everything in between.
Good debt v bad debt
There is such a thing as good debt and bad debt.
Good debt is when you borrow money for something that can increase in value over time. For example, your home loan or a student loan. Your home can increase in value over the years, and education can often lead to a steady career and regular pay. Since these debts can help you achieve a better financial position, they’re considered good debt.
Bad debt is borrowing money for something that is likely to decrease in value or something you could have saved up for instead. For example, a car loan, credit cards or buy now pay later services such as Afterpay and Klarna.
Impact of buy now pay later
Using buy now pay later services or credit cards for goods you don’t need means that you are in danger of living in a reverse payment cycle. This is when you buy things and then pay for them over a relatively long period of time. As well as spending more than you may be able to afford you will pay high interest on the repayments of these services. Meaning you’re spending more than you would have to if you saved up for the purchase instead.
Where possible, avoid spending more money than you have.
Aside from the direct impact these services are having on your expenses, they can also have a negative impact on your credit rating. If you are late with repayments, this will reduce your credit rating meaning you might find it difficult to get approved for loans in the future.
Set a realistic budget
To avoid overspending and relying on credit cards and buy now pay later services, take time to review your fortnightly or monthly spending. Are there expenses you can cut back on? For example, how many subscriptions do you have? Or are you getting take aways often?
A lot of power can come from being aware of your situation. Understanding your pain points in your budget and how you can overcome them.
You may be positively surprised when you cut back on expenses and pay off your credit card or buy now pay later as you’re freeing up income that you previously would have spent on interest and loan repayments.
The Moneysmart budget planning is a free tool to help you review your expenses and create a new spending plan.
Top tip: Create an emergency fund
Aim to create an emergency fund of $2,000 so that if your car breaks down or you need to replace an appliance, you don’t need to rely on buy now pay later or your credit card to fix these problems.
Want to strengthen your money management skills?
Did you know, Keystart also offers a free financial coaching program with the Financial Counselling Network? Eligible customers can access free one-on-one coaching sessions to help improve your money management skills.
