The Five Issues That Can Lead to You Falling Into Deeper Debt

Dominique Grubisa
Dominique Grubisa

Published 3:03 am 23 Oct 2019

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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.

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 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.

Debt Recovery

Debt Recovery

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

Over 1 million households struggle with mortgage stress

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.

If You’re in Debt

Being in debt places you into a precarious financial situation which can quickly snowball into a catastrophe.

One of the clients at DGI Debt Management was a business owner and the primary provider for his family, when the pandemic hit and dramatically reduced his income. In order to continue paying his bills and putting food on the table, he began to take on more debt than he could afford and quickly found himself with $20,642 in debt.

The Debt Management team was able to reduce his debt down to just $3,759, cutting 82% of his total debt off and giving him the breathing room he needed to get back on his feet.

On top of that, he no longer had to worry about the possibility of bankruptcy, or having to deal with creditors anymore.

To find out if the Debt Management team can improve your debt situation, visit DGI Debt Management today.

Good Debt Vs Bad Debt With Dominique Grubisa - DG Institute

Lawyer, Asset Protection Specialist and Property Educator

Dominique Grubisa is a practicing lawyer with over 25 years experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

About DG Institute

Founded in 2009, DG Institute strives to empower everyday Australians to grow and protect their wealth. Our goal is to provide direction, motivation and inspiration to our clients and help them perform at their very best. We do that through our professional services, in addition to teaching them how to grow their wealth through property and business education.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

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