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Credit cards, hire purchase, and personal loans. These types of debt have become more commonplace and acceptable in the last 20 years.
Stuff.co.nz reported in 2010 that Kiwis owe more than $12.7 billion in personal debt: $5.2 billion in credit card debt, $3.8 billion in hire purchase schemes and store cards, and $3.6 billion in other types of loans. This averages out at $4,400 per Kiwi adult—not including mortgages or student loans.
Why is it so acceptable to borrow money? One reason is because your debt benefits banks, credit card companies, and loan providers: it’s in their best interests to normalise debt. We are part of a generation that thinks it’s normal to come out of university owing thousands of dollars. Furthermore, the increase in online shopping has meant that credit cards are being used more and more. People are impatient: we want the latest version of the iPad, iPhone, etc., but we can’t afford it, and so we turn to our old friend debt.
Most of us find it difficult to stick to the strict budget needed to pay off a loan or a credit card. The best thing to do is to avoid getting into debt in the first place. Don’t mistake a want for a need, and try saving up for big purchases. If you really can’t avoid getting into debt, here’s some info on how to deal with it.
Credit cards
Credit cards are cards that allow you to buy stuff with money you don’t have with the promise that you will pay the money back. If you don’t pay your credit card debt back at the end of the interest-free period, you will incur fees and start paying a very high rate of interest on your debt. If you don’t think that this is a big deal consider this: Stuff.co.nz reported in 2009 that New Zealanders owed just under $3.5 billion in interest-bearing debt on our credit cards. If this amount remained stable, credit card companies would have collected $700 million for that year.
Spending
If you don’t think you can pay off your credit card at the end of every month, or you’re a compulsive spender, don’t get into credit card debt as you will start paying interest. If you have to buy something, use one of the online credit card calculators to work out the interest you will have to pay.
Overseas purchase costs
Looking at taking an OE? Gonna wow some foreigners with your sexy Kiwi accent? Well, if you’re looking to use your credit card, consider the fees involved: the currency conversion fee (which you will probably have to pay if you go to a money exchanger anyway), and the fee charged by MasterCard, Visa or American Express.
Avoid temptation
If you’re going to hit the town tonight, leave your card at home. Enough said.
Hire purchase
Hire purchase is a situation where you buy something, say, a TV, with a loan using the TV as security for the loan. You’ll usually make a deposit on the loan, and it will start receiving interest. Some loans will not require deposits, and may have an interest-free period, but make sure you have a plan to pay the debt off. Once you have purchased your TV, you will get a ‘conditional purchase agreement’. Unless you want to get screwed by the fine print, read it before you sign it.
Personal Finance
If you need a loan, try your bank first. If they are not willing to lend to you, perhaps you shouldn’t be borrowing. You can get free debt counselling from your local Budget Advice Service, or check out Student Hardship if you’re borrowing money for household basics.
Personal finance loans usually have high interest rates. If you really need the cash make sure you calculate the total amount you will be paying back over time, rather than the weekly amount—the total usually ends up being very high. Make sure you check out insurance costs, fees, and charges when signing up, as failure to pay in time may result in further fees. Shop around for a good interest rate: make sure it is fixed and not subject to sudden change. Be aware of when your payments are due, and make sure you have the money to cover them.
Know the risks of borrowing from lenders who take security in all your personal property. If you get behind in payments, they could claim the right to take all of your household goods. Try not to borrow more to refinance a debt. Talk to your lender instead about ways of reducing the interest on your existing loans. Finally, avoid acting as a guarantor for other people’s loans, as if they don’t pay, you will have to. *
Help
If this isn’t enough you can check out the following places for advice and information:
Consumer.org.nz
Familybudgeting.org.nz
Sorted.org
The Stuff.co.nz blog ‘Lady in the Red’
The Wellington Citizens Advice Bureau offices on Victoria Street, Aro Street and Karori Road
The Ministry of Consumer Affairs’ website has a section on credit card debt