Managing debt
Preparing for home ownership
When debt is managed well it can be very helpful. Find out the difference between good and bad debt.
What is debt?
Debt is anything you owe to someone else. Home loans, personal loans, credit cards and payday loans are all forms of debt.
Managing your debt
To be eligible for a home loan, it helps to have a good financial history. This means paying your debts on time and not having too many forms of debt at one time. Your lender will check your financial history by looking at your credit score when assessing you for a home loan.
Don't know what a credit score is? Find out more.
To prepare for a home loan application, it's important to be in control of your debt. For starters, you should know the total amount of debt you currently have.
Let's take a look at Murray.
He bought a second-hand car last year and owes $5,000 on his car loan. Over the years he has also taken out two credit cards. At the moment, he owes $6,350 over the two cards. That means Murray's total debt is $11,350.
If Murray wants to apply for a home loan, his debts will affect how much he can borrow. Most likely, if he paid off his debts he could borrow more.
Good debt vs bad debt
Good debt is a debt that can add to your overall financial position. This is when you take out a loan for something that can build wealth or increase your income over time.
Bad debt is borrowing money to buy something that will quickly drop in value. Or it is borrowing money to buy something when you could've saved up for it instead.
Good debt
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Home loan
Having a home of your own can give you security, stability and can be passed down to your children. Your home may also increase in value over time.
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Education
Training and education often lead to a steady career with a regular pay packet.
Bad debt
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Car loan
Car loans can be considered bad debt as cars usually lose their value quickly.
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Credit and store cards
These cards often charge high interest which can make repaying them difficult.
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Payday loan
These are short term loans with high interest and are typically used to pay for goods that won't increase in value.
The aircon in Tomas' car has broken...
It costs $500 to fix. Tomas uses a payday lender to borrow the money to fix his car. This loan is for $500, but it's going to cost $800 to repay over 12 months because of its high interest rate. Is the loan worth it?
It's a good idea to create an emergency fund. Have about $2,000 in this fund that you only access for unexpected costs such as car repairs. This will help you avoid taking out short-term loans in a pinch.
Want to learn more?
If you're concerned about your debt, connect with a free financial counsellor.
Whilst we have made every effort to ensure the accuracy of information on this page it is general only. The information is subject to change and has been prepared without taking your financial situation, requirements and objectives or needs into account.
We suggest you seek independent financial advice before you make any decisions about your financial needs.
