Experts warn taking small loans quickly could affect credit score

Cash-strapped Australians caught in a cycle of debt have been urged to avoid falling into a common but risky financial trap.

Dozens of news.com.au readers recently shared their personal debt stories, many reporting that they were “drowning” in the “cut” and “excessive” debt and struggle to break the cycle.

Every two years, news.com.au runs its Cost of living survey to learn more about our readers’ biggest household money worries.

The most recent survey results are available, and news.com.au has now launched Project Money in response, which will reveal the biggest money challenges deal with Australian households and offer practical help on how to get your finances in shape for 2020.

One of the financial pressures that emerged from the survey was debt, with about half of respondents revealing they had over $ 5,000 in credit card debt – while only 45% had over 5,000. $ savings.

As part of the survey, respondents were asked to choose whether they thought they were in “Struggle Street”, “Barely Coping”, “Doing OK” or on “Easy Street” depending on how they thought they were doing financially.

Those who say they barely get by or on Struggle Street are more likely to be in debt, while those who live on the easy street are 58% more likely not to go into debt now – while those who barely getting by are 145% more likely to believe they will always be in debt.

According to Mark Jones, CEO of market lender SocietyOne, the rising cost of living is a common concern among Australians.

“Despite Australia’s place in the top three countries for personal wealth last year, it was also reported that costs such as preschool and primary education increased 159% between 2000 and 2019,” a- he declared.

“Other expenses such as electricity and hospital or medical costs have increased at an even higher rate.

“With this in mind, there is no doubt that Australians, especially young families, could be feel the pinch, regardless of their income.

But Mr Jones said there are also common financial mistakes that exacerbate financial pressures – and offered some tips to help you consolidate debt and get your budget back on track.

“A lot of people don’t realize how much interest they’re paying on multiple credit cards and loans – consolidating that debt into a low-rate personal loan not only makes it easier to manage your monthly budget, it can also save you money. hundreds of dollars. in the interest, ”he explained.

He said another common mistake was putting a large expense on a credit card and not paying it back within the interest-free deadline.

“With credit card interest rates above 20% per year (after) a few purchases like this, you could end up paying a lot more than you planned, taking into account the interest you paid. in addition to the amount of the original purchase. ” he said.

“It might sound obvious, but it’s really important to live within your means and make sure you pay your bills and any financial repayments on time.

“When you’re saving, it can also help to put some ‘fun’ money into your budget to avoid the urge to overspend. “

Mr Jones said that when looking for a personal loan or other financial products, it is important to look for providers who will give you a rate estimate without affecting your credit score.

“What people often don’t realize is that applying for multiple credit cards and personal loans – especially over a short period of time – will lower your credit score, making it harder to get a good credit. deal or could even cause a lender to refuse an application, ”he said.

Mr Jones said it was important to find the “right” loan deal, and the bad ones were usually provided by payday lenders who offer money quickly – but with a trap.

“Be very careful because payday lenders make it easier to get money, but there are often many fees and charges that can affect your ability to get credit later from a good credit provider. “, he warned.

“If we see someone who has taken out a small loan quickly, that’s a red flag and we’ll investigate further.”

Finder’s money expert Bessie Hassan told news.com.au that the comparison site’s own research found it takes an average of 7.1 months for Australian credit cardholders to pay off their debt. .

However, 15 percent will take longer than a year, while 28 percent say they couldn’t manage their finances without a credit card.

Almost one in ten has credit card debt over $ 20,000 and, sadly, over 650,000 Australians do not expect to pay off their debt for at least five years.

“Budget to keep you on track to spend and save. Figure out which debts are costing you the most in fees and charges and make a conscious effort to pay them off first, or move them to a cheaper establishment as soon as possible, ”she advised.

“For those with credit card debt, transferring current debt to an interest-free balance transfer agreement could help you pay it off sooner and more cheaply – there are currently 0% offers available for a period of up to 26 months.

“The key here is to commit to paying off the debt within the interest-free time frame. Calculate how much you need to pay off each month to make sure your balance reaches zero at the end of the balance term.

“If your debt seems completely unmanageable, visit the National Debt Helpline for free, confidential advice from professional financial advisers. “

BREAKING THE CYCLE

Mr Jones urged Australians who are juggling credit card debt or buying now, pay later to figure out exactly how much interest they were paying, then put a solid budget in place to avoid getting into even more debt. .

Then learn about your credit score, as this can affect your ability to get future credit. This can be done easily – and free once a year – either through national credit reporting agencies such as Equifax, Experian or illion, which are listed on the Australian Government website by providing credentials.

Then consolidate all your debts into one after looking for the best rate.

“Debt consolidation is a good option and then you can come up with an orderly payment plan to pay off what you owe in a shorter period of time with a lower interest rate,” he said.

He said it was also essential to pay bills on time to avoid being burdened with fees and to start saving for a “rainy day” or unforeseen future expense.

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