You may have heard of good debt and bad debt but if you haven't, bad debt is anything you've borrowed that is not generating an income. There is nothing good about credit-card debt.

Credit cards, which may have been pushed to their limit over the festive season, be it on holidays, gifts or post-Christmas sales, should be paid off as soon as possible.

Home mortgages fall into the same category of bad or non-tax-deductible debt and should be paid off as quickly as possible.

"It is dead money when you are paying interest, particularly if you have just used a credit card to buy stuff. It really adds nothing to your financial situation," Centric Wealth adviser Debbie Turvey says.

It is not until you have paid off your non-deductible debt that you can start saving, she notes.

Turvey says a good starting point for people with multiple debts is to list everything you owe and how much interest you are paying.

"Consolidating debt into a lower interest rate environment can be good, bearing in mind that if you consolidate it into a home loan you need to pay it off as quickly as possible or you can end up paying more in the long run," she says.

Anyone with a mortgage should aim to direct any spare cash into it.

"Even if you want to keep some cash available, make sure it is in an offset account so the interest you are charged is reduced," Turvey says. "Paying your salary into the offset account can help top it up until you need the funds."

If you are really serious about getting rid of debt, you may need to consider selling some stuff on eBay or getting a second job just to make some inroads. "It will take pain and discipline," Turvey says.

Multiple cards

If you are one of the many people who have more than one credit or store card and they are spiralling out of control, then now is the time to get on top of things.

A first step might be to consolidate. Just having them will mean you are tempted to keep using them. Debt consolidation eliminates being hit with several nasty bills each month and means just one repayment.

The first thing to do is look at which cards have the highest rates and pay them off first. While you may only be paying the minimum monthly repayments on other cards, by taking out the highest monthly charge you increase the chances of reducing the debt.

Balance transfer is a concept that may work for you if you are disciplined. You are actually taking on a new credit card but will pay a fraction of the interest on the amount you transfer for a set period.

According to creditcards.com, there are balance transfer rates of 2.99 per cent for 12 months, compared with normal monthly interest charges starting at 11 per cent.

The trick with balance transfer is to pay off everything owing. Any new purchase on the card will attract the purchase rate of 11 per cent plus.

By eliminating the higher-interest credit cards, you should be able to completely pay off more credit cards and cancel them faster than if you simply made the monthly repayments off the higher-interest cards.

Once your debts are gone, or reduced, look at online banking as a way of making payments on time and eliminating the risk of late fees.

Refinancing

Making additional repayments on your home loan, especially in the early years, can make significant savings on interest and see you pay off your loan quicker.

Another way to get ahead is to look for the lowest interest rate. Rising or falling interest rates can impact on how much you pay back each month and how much you pay in interest over the life of the loan.

It may mean having to switch financial institutions but the savings could be worth it, particularly in a competitive environment as we have now.

But do some homework before you leave your current loan. First, work out how much it will cost you to switch to a new home loan. Is there an exit fee from the current loan and a set-up fee for the new loan? Work out whether reducing your interest rate with a new loan outweighs the costs of switching from your existing one. The lower the exit and start-up fees, the more you stand to gain by switching.

Home loan rates and many of the charges can be compared at canstar.com.au and infochoice.com.au.

Case study

There may be tens of thousands of dollars difference between a mortgage and the limit on your credit card but debt is debt when it comes to your borrowing capacity for a home.

If 2010 is your year for entering the property market, not only should you have little or nothing to owe on your credit card but now is the time to lower the limit.

The head of consumer advocacy for Resi Mortgage Corporation, Lisa Montgomery (pictured), says there is a direct correlation between the limit on your credit cards and the limit you can borrow for a home loan. Even if you don't use the high limit attached to your card, by having it available, a lender will assume you can potentially use that maximum amount, revising down your loan capacity accordingly, she says.

Lenders will assess a borrower's loan application based on a variety of factors but when they see high credit-card limits, they view it as a greater chance of that borrower getting into financial difficultly and their borrowing capacity is reduced.

"A lender doesn't take into consideration what you owe on your credit card and that payment but rather it's the limit and the payment the borrower could potentially be liable for if they borrow to the max," Lisa says.

"Reducing credit card limits before shopping around for your loan can mean the difference between tens of thousands of dollars on what you can borrow — and in a climate of rising interest rates and rising property prices, this factor alone can make a dramatic difference to a borrower's options."

A lifetime in the red

Paying just the minimum 2 per cent each month on a $10,000 credit card debt without extra spending will take 62 years and eight months to clear the debt, at the cost of $32,457 in interest. Slightly larger repayments can dramatically improve the equation for card holders. If you make your minimum repayment $250 instead of $200 you can pay the card debt of $10,000 off in five years and four months.