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Paying off debt: 5 simple debt reduction steps

02 November 2021

Whether it’s credit cards, personal loans, or BNPL - debt doesn’t have to be a life sentence. These 5 debt reduction steps may help you reach financial freedom.

Debt tends to conjure negative connotations, but it’s not always a dirty word. Whether it’s to back yourself in business, invest in lucrative assets such as property, create a safety net to leave a toxic situation, or just purchase items you need now on credit, there are some valid reasons for taking on debt.

Wielded wisely, debt can be a helpful tool for investing in your future. However, it comes with a price tag. The fees and interest rates charged by financial providers – whether it’s on a mortgage or personal loan, for example - can make what seems like a manageable debt repayment quickly spiral out of control. You can end up feeling as though you’re drowning in debt.

The good news is debt doesn’t have to be a burden you carry forever. These simple steps can help get your repayments under control and you back on the path to financial freedom. In this article we are mainly dealing with the sort of debt that many of us get involved with when using a credit card or something similar.

5 simple steps to be debt-free

1) Face your debt head-on

Feelings of guilt or shame often accompany being in debt. This can lead to denial or avoidance of the debt. Maybe you’ve avoided opening bank statements, missed or made late repayments, or only paid the interest owed on the debt. The issue is how quickly it can snowball from a molehill to a mountain.

It can feel intimidating at first but confronting your financial situation head-on is far more empowering. Put yourself back in the driver’s seat by facing the issue, preferably with a plan. It will give you a sense of clarity and momentum to keep moving forward. Shame thrives in the dark. In the open you’ll often find your financial situation isn’t as insurmountable as you thought.

2) Put together your debt reduction plan

Gather these documents together:

Your last 3 months of bank statements.

Your last 3 months of payslips.

Documentation of your loans and outstanding payments — including things like ZipPay, AfterPay, credit cards, outstanding bills, and your HECS-HELP university loans.

Documentation of any assets such as savings, home loans, or investments.

Grab a highlighter and pen and spend time going through your finances. Look at your total amount owing between any loans, credit cards. Decide which ones are costing you the most in interest and repayments and prioritise which ones you’re paying. Try and pay the highest repayments you can comfortably afford on each loan and then move to the next. Look at what you are spending and cut down any unnecessary expenses to increase your repayment amounts. Doing this will show you where you stand financially.

3) Speak to your bank

Believe it or not, most financial institutions or utility providers (gas, water, electricity) are on your side when it comes to debt. It’s in their best interests to help you pay off your debt on time — that’s why there is such a rigorous screening process to secure a loan in the first place. If your debt obligations feel overwhelming, it’s worth a call to your bank to work out what alternative debt repayment options might be available for your circumstances.

For example, Westpac’s Assist team exists to help people get back on their feet after unplanned life events or financial hardship. If you have missed a payment or are worried you can’t pay, you can simply contact them to find out how they can help you get back on track. You can also access alternate payment plan options for credit cards and Flexi loans using your online banking.

For more serious life events such as illness, changes in income, relationship breakups, or emergency events, you can also seek financial assistance through Westpac Assist. Help may be in the form of reduced or deferred repayments for a period of time, or another solution tailored to your specific financial situation. It may also include referral to specialist help should you need extra care.

 “We know our customers may need support in different ways, at different times in their lives. There is no need to feel embarrassed about asking for help, and it’s better if people come forward sooner rather than later as that is when they are likely to have more options available to them,” explains Tasha Chye, Westpac’s Senior Manager, Community Advocacy & Priority Assist, Customer Assist.

4) Consider debt consolidation

Another way your bank may be able to help you is by offering you a debt consolidation loan. This is where you combine all your existing debts such as credit cards or loans into one, easier-to-manage loan. It works by using the funds of the new loan to pay off all your other outstanding loans together.

The beauty of debt consolidation is in its simplicity and cost savings. Rather than paying different bills at different times (each with its own interest rates and fees), you will simply be paying off one loan with a fixed interest rate. These are usually unsecured personal loans, which typically have more accessible interest rates than credit cards (think 8.99% vs 20% per annum.) You will also have one, clear end date to pay off your loan, which makes it easier to create a financial plan.

That said, while debt consolidation is a helpful strategy, it isn’t right for everyone. You may need to meet certain eligibility requirements, such as a good track record for making payments on time, or a certain credit score. If you only have a couple of outstanding debts and they are with multiple banks or have a low interest rate, consolidating debts may also not always be worth the admin involved. You can use a debt consolidation calculator to help determine what your repayments would be and whether it’s a good solution for you.

5) Ask for help

If figuring out where to start still feels overwhelming, the good news is you don’t have to go through it alone. There are plenty of support systems available to help you figure out your best next steps. The best part is you don’t have to pay an expensive financial advisor for advice — many of these resources are free.

These include:

National Debt Helpline: A free helpline where you can speak to independent financial counsellors. They will be able to assess your financial situation and provide advice on things like creating a realistic debt repayment plan and dealing with creditors. Call: 1800 007 007

Way Forward: A not-for-profit organisation helping those with financial difficulties become debt-free. They can help with creating a budget, negotiating with creditors and consolidating debts. Call: 1300 045 502.

Human Services (Centrelink): The best place to start to gain information about Federal Government initiatives and eligibility, for example, COVID-19 relief schemes.

ATO Small business helpline: Free, one-on-one financial support provided by the Australian government for business owners for issues like bankruptcy or difficulties paying tax bills. Call: 13 28 46.

Davidson Institute: A Westpac initiative offering a range of financial literacy tips and tools for individuals, businesses, not-for-profit organisations and community groups.

A few tips on debt reduction

Armed with all the necessary information and some helpful advice, it’s time to devise your plan of attack. This means figuring out:

What strategy you are going to use to pay off each of your loans? For example, you may choose debt consolidation, or pay off the smallest loan before moving on to the next; pay off in chunks or make equal payments each month.

What timeframe are you going to pay your debt off in?

What systems and automation are you going to implement to reach your goal? (For example, setting up automatic monthly direct debits.)

What accountability will you have in place to keep you on track? (Maybe ask a friend or loved one to check in on you.)

What are your short-term and long-term debt repayment goals and how are you going to celebrate meeting them? (It’s an important step to keep you motivated!)

Once you’ve answered all these questions, The Davidson Institute’s Budget Planner Tool is a great place to capture your plan and track your progress.

Now, you have your roadmap to a debt-free future. Remember, you don’t have to achieve your goals overnight — but by taking small, consistent steps over time you can empower yourself to change your circumstances.

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.

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