5 steps to help clear your debts; clean up your credit file and pave the way for new finance goals in 2012.
For those of you who have made a New Year’s Resolution in 2012 to get back in control of your finances and reign in all those outstanding debts from last year, you are not alone.
According to a recent survey by ING Direct, of the two thirds of Australians who will make a New Year’s resolution for 2012, more than half will focus on their finances.
ING Direct says among those making financial resolutions, 34 per cent resolved to save more in 2012, 24 per cent resolved to reduce their debt, 16 per cent said they intended to take control of their spending and another four per cent said they planned to switch banks in the New Year.
ING’s Executive Director Brett Morgan says “It’s good to see Australians are focusing on the importance of financial goals for 2012 and there are steps we can take to stay on track with these resolutions throughout the year.”
“Make sure your resolutions aren’t too big or difficult to achieve. It also helps to quantify your goals – aiming to save $50 each week is a more concrete goal than simply aiming to ‘save more’.”
So here are five practical, positive steps anyone can take to improve their finances.
1. Understand your debt.
Before you can start saving a significant amount, you need to really understand how much you owe. Savingsguide Australia recommends for anyone who has made a New Year’s resolution to get out of consumer debt, they should first tally up everything they owe.
“Without the big number, however terrifying it is, you won’t be able to start a serious schedule of getting yourself clear of consumer debt,” Savingsguide recommends.
The good news is – generally with Christmas and New Year celebrations and expenses out of the way – the next month’s credit card statements should automatically look better before you even start.
2. Make a plan to repay your debt.
Most people with significant debt generally have it stacked up on a credit card – or cards. Unfortunately most are at high interest rates which make it often impossible to get on top of. Many experts recommend switching all debt to one card with a lower interest rate, or even swapping to a personal loan. But the best advice we can give on credit card debt is to repay above the minimum amount set by the bank – which will allow you to actually make progress on clearing the debt because you will be saving interest.
If you continue to have multiple cards, the Government’s Money Smart website has these recommendations:
Dealing with multiple credit cards
Got more than one credit card? Step your way to credit card freedom and feel the stress go away.
Step 1: Keep up your repayments
Pay off as much you can on the total amount owing on the main credit card you are using each month. This will let you take advantage of any interest-free period and help you pay off the whole debt (not just the interest, fees and charges).
Step 2: Pay the smallest debt or highest interest rate
Choose one of the two strategies below:
Pay off the smallest debt first – Continue making minimum payments on all cards but aim to clear the one with the smallest debt first. Then work on paying off the next smallest debt, and so on. You will reduce the risk of incurring multiple charges for late or missed payments and save on annual fees. The money you save can be used to pay off other debts.
Pay off the card with the highest interest rate first– Continue making minimum payments on all cards but pay off the credit card with the highest interest rate first, then work your way through your other cards. This may save you money on interest payments.
Step 3: Close the account as you clear each card
Whatever option you choose, stop using all but one of your credit cards (and try to only use it for emergencies). As you clear each card, cut it up and close the account. If you don’t, you may still have to pay fees on the account, even if you aren’t using it.
Step 4: Lower the limit on your last card
Finally, lower the limit on your last credit card to an amount that you can repay within 3 months, say $2,000.
3. Be more aware of what you are spending.
Make a resolution to not bury your head in the sand about bills. Pay them straight away if you can or diarise their repayment. Read all of your bank and credit card statements when they come in. While you are attempting to implement the new savings pattern, read and keep all of your receipts.
If you are not particularly organised – you may even like to resort to the ‘shoebox method’ – which is basically keeping every receipt for the week or month in a shoebox, and transferring it after that time onto a spreadsheet which allows you to track your spending and gives more focus to where you might be blowing out your budget.
You may find after reviewing your spending you can see where you are wasting money. Maybe taking lunch to work or eating out less can make a significant dent in your spending – or perhaps just skimping on all those takeaway coffees will give you enough extra money that you can squirrel away.
4. Commit to savings.
Savingsguide’s Must Do Moves for 2012 include striving to save 20 percent of your income, albeit after repayments are made on existing debt. They also advise setting up a separate savings account which can’t be accessed easily.
“Look for an account with a high interest rate and rewards for accounts that don’t have withdrawals,” they recommend. “Set up automatic deductions, and don’t touch it.”
5. Clear your credit file of errors.
There is no point making a significant dent in your consumer debt and saving regularly if you are unable to make use of your new found financial prowess. Many people find they do all the hard work of saving towards a home or car loan, only to find their past comes back to haunt them.
They may apply for a loan, only to be refused due to credit file defaults which show up on their credit report. Basically any creditor is able to place a default on a person’s credit file if a repayment is later than 60 days. There may be times when this has occurred and you are unaware of it.
Whatever the situation, credit file defaults need to be treated very seriously. They are most times an instant negative for any bank who is thinking of lending you money. And the thing is…they hang around for 5 years. What are your financial goals 5 years from now????
It is good financial practice to get a copy of your credit report each year, and make sure everything is as it should be. This report is FREE every year from the credit reporting agencies. You may have listings with one or more of the credit reporting agencies.
There is a potential for errors to be present on your credit report.
Credit reporting mistakes do happen, but the watchdog is YOU!
If a default has been listed ‘unlawfully’ you have the right to request its removal from or amendment of your credit file.
Many people get the run around from creditors when they try to do this – or they get bogged down in all the legalities. Unfortunately the potential is there to ruin your chances of getting the default removed if it is not handled the right way. We suggest you get a credit repairer on the case, they know the legislation and can work within it to force creditors to honour their obligations under Australian law and negotiate the removal of any errors from your credit report.
Visit MyCRA’s main site www.mycra.com.au for more information.