Shocking debt ruins young women's debut

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David Koch, Sun Herald, 23rd of April 2006

This is no time to be maxed out - so do more than just worry about it.

THEY are Australia's new generation of deb(t)utantes: young women up to their eyeballs in debt and walking a financial tightrope at a time when rising interest rates could just tip them over the edge.

With a strong economy, historically low interest rates and easy credit, young women have been seduced into living well beyond their financial means, convinced the good times will never end. But they will and it's important to act now.

Does this describe your current situation?

• There are fewer dollars left at the end of each pay period and you have to dip into savings, if any, regularly.
• The credit cards are regularly maxed out.
• You can only afford to meet the minimum payment on the monthly credit card bill.
• You're unprepared for unexpected expenses that may crop up, such as house and car repairs.
• You lose sleep at night worrying about how much you owe and how to pay it back.

If this is you then it's time to act.

I know I sound boring. I get accused ofthe same thing by the four women in my family. But just thinking about and following a few basic rules will transform your financial wellbeing - and you'll still be able to afford that new pair of shoes but without losing sleep over the purchase.

1. Understand the difference between good and bad debt. Good debt is borrowing to invest in quality shares and property or to buy a home or start a course to improve your career. In these instances, you're borrowing for a good purpose as long as you don't overdo it and are confident it can be paid back. Bad debt is borrowing or using a credit card to buy consumer items such as clothes, travel and entertainment. There's no faster way to fall into debt. Instead, decide to use only cash for consumer items.
2. Do a budget to control your spending. It's just so easy to flash the credit card and spend literally thousands of dollars without giving it a second thought. It's too easy. Start a routine of writing down everything you spend and, at the end of every month, examine what you've done. You will be amazed and maybe a little horrified at where the money has gone, but I bet you'll think twice in future.
3. Pay off your most expensive debt. It's common sense, but pay off the debt with the highest interest rate first. That means store cards first (up to 24 per cent), then credit cards (12-16 per cent) and then the home loan (7 per cent). Cutting interest payments is just as important as saving. So, for instance, don't pay more off the mortgage until the credit cards are wiped out.
4. Don't fall into the minimum trap. That monthly credit card balance looks horrific, but then you take comfort in the much smaller minimum balance owed. I know it looks a lot better, but paying the minimum balance barely covers the interest you owe so you're not reducing your debt at all. The bottom line is that it will take years to pay off the balance while the interest payments will skyrocket. Start eating into that balance.
5. Build an emergency stash. Nothing wrecks your budget more than an unexpected bill as the car or the fridge breaks down. Build up the equivalent of three to six months' salary in to an at-call savings account that just sits there to meet the unexpected. Don't touch it for any other reason. Not having the right shoes isn't classed as an emergency.
6. Get help quickly. If you're in trouble, talk about it. Talk to your bank or credit card issuer about a payment program tailored to getting you out of trouble. Talk to a financial counsellor or CreditLine for personal advice on what you can and should do.