The Five Issues That Can Lead to You Falling Into Deeper Debt
Published 3:03 am 23 Oct 2019
Nobody wants to deal with debt collectors. That’s why you need to use these tips to control your spending habits so you don’t end up deep in debt.
Poor money management is the bane of life for many Australians. Whether you’re an investor or just a regular person, you’ve probably experienced debt before. You’ve likely borrowed money to buy a house, and you may have credit cards or car finance.
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Most people carry a certain level of debt.
The danger is that you can fall deeper into debt if you’re not wise about how you use it. This article examines the five issues that can lead you astray.
Is All Debt Bad?
Before looking at those issues, it’s important to make the point that not all debt is bad debt.
As an article published on news.com.au explains:
“Debt is best where it buys something that produces income in future. That income helps pay off the loan – like borrowing to start a successful business, or getting a qualification that helps you earn more.”
For example, borrowing money to buy an investment property leads to the creation of good debt. That’s assuming the property generates enough income to repay the loan.
The problem is that much of Australia’s $1.8 trillion of household debt isn’t going to produce an income. That may be the case for much of your debt too. This is why it’s so important to understand the issues that can make debt worse.
Issue #1 – Thinking You’re Not in Debt
Perhaps you’re not lying awake at night worrying about money. There aren’t any debt collectors banging away at the door. You feel financially secure.
Even in this situation, you may have created a debt anchor for yourself.
DG Institute founder Dominique Grubisa highlights the potential issues with this mindset:
“My husband and I once had a credit card that was maxed out at its $30,000 limit. We carried that for over eight years. And we were paying over $800 a month just in the interest repayments.”
Dominique wasn’t experiencing money issues. But that credit card debt still created a debt anchor.
Think about your own situation. You may have loans and credit card repayments. Perhaps you also have personal finance and car loans. All of those things place a drain on your monthly income. This means you can’t use that money for anything else.
And if your personal situation changes, those debts may drag you down in the long term.
Issue #2 – Your Property’s Value Falls
In June 2019, The Guardian reported on the issues falling property prices can cause:
“…Data from the Australian Bureau of Statistics revealed a fifth consecutive quarter of residential real estate losses, which was the main factor behind a decline in household wealth per person by $1,500 to $404,566.”
Such declines lead to increases in the ratio of mortgage debt to real estate assets.
Simply put, when your property loses value, you gain more debt. This is a particular issue for investors, as it can mean you have less equity to leverage when trying to build a portfolio.
Issue #3 – You Have a Bad Credit Score
Your credit score impacts your ability to get approved for a loan.
Whenever you apply for a loan, your lender will check the date from credit ratings agencies. They want to see that you have a good track record of borrowing. Ideally, they’ll see that you borrow responsibly and make repayments on time.
However, your credit score may fall for a number of reasons, which we detail in another article.
Having bad credit means it’s harder for you to borrow money. You lender may even refuse outright, which could lead to you considering bad-credit lenders. These typically charge higher interest rates for their services.
Thus, you’re creating more bad debt.
Having a bad credit score is a sign you’re struggling with a debt problem. In such cases, it’s best to work with financial planners to solve the issue before trying to borrow more money.
Issue #4 – Financing Debt With More Debt
That means one third of Australian homeowners struggle to pay their mortgages every month.
Imagine the following scenario:
The mortgage payment’s coming up, but you’ve spent the money on household essentials. That means you don’t have enough to make the payment.
So you put it on your credit card.
You’ve just financed one debt by creating another. If this sort of behaviour continues, you’re essentially creating a second debt that pays for the first. In the above example, you’re likely paying a higher interest rate on the second debt.
That means your monthly outgoings increase, which places more stress on your finances.
This cycle is incredibly difficult to escape from.
Issue #5 – Buying Things You Can’t Afford
This may seem like an obvious issue. However, this is also exactly what credit card companies thrive on. They want you to use credit to buy things you can’t really afford. That’s how they make their money from you.
The issue comes when you get trapped into trying to maintain a certain standard of living – one you can’t afford. You need the newest car, the best TV, and all the latest clothes.
So you put it on credit. And in doing so, you’re creating a lot of bad debt.
Be honest with yourself about your income and what it allows you to afford. Budget appropriately and get out of the mindset that you need to have everything right now.
Escape the Debt Spiral
When you’re down deep inside the debt spiral, it may feel impossible to escape.
You start paying for one debt by creating others. Your credit score drops and circumstances outside of your control affect the assets you own.
The good news is that acknowledging the problem is the first step on the road to fixing it. And what you may not realise is that you have several options available to you when it comes to dealing with debt.
Get Your Debts Back Under Control, Enrol Now For The Debt Control Mastery Online Course.
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