Stretching out your dollar

Kiwis suffering from "recession depression" are urged not to blow the extra cash in their pay packets from tax cuts, which come on the back of latest figures from the Reserve Bank and Statistics New Zealand showing we're finally taking control of our finances.

Retirement Commissioner Diana Crossan told earners: "Don't let the extra money slip through your fingers. Find out how much you'll be getting and make a conscious decision about what to do with it."

Crossan's plea for workers to make their tax cuts work for them - by applying it to knocking down debt or saving an emergency fund - comes at the same time as signs that New Zealanders' love affair with credit has already waned.

Reserve Bank and Statistics New Zealand data for total outstandings on all cards in February continues a dramatic softening of credit card outstandings over the past eight years.

Growth peaked at more than 20 per cent in February 2001 and sits now at just over 3 per cent.

Stuart McKinlay, New Zealand manager for MasterCard, says this shows cardholders are increasingly using their credit cards as payment tools, not as a way of borrowing.

Declining credit card billings reflect consumers consciously changing their spending behaviour, choosing to use credit cards less and debit cards more.

Combined with a continuing cardholder trend towards reducing revolving debt levels, "we are seeing a real cultural change in the way people pay for their purchases," McKinlay says.

However, Kiwis still need to be on guard to ensure their debt levels are manageable. A rough guide is that if you're spending more than 20 per cent of your take-home pay on debt repayment (excluding rent or mortgage payments), then your total debt may be too high, McKinlay says.

Those who want to make the most of tax cuts should think about reducing high interest debt rather than letting the extra money go on everyday expenses, says Crossan.

It takes more than just paying back the minimum repayments each month to reduce debt.

Paying back more than the minimum eliminates debt faster. You also save significant sums in the long term by reducing the amount of interest you'll pay on the outstanding debt.

If you only pay the minimum required on a credit card balance, for example, you would likely have paid the initial purchase price many times over.

A $2000 balance on your credit card at 19.5 per cent at a minimum payment rate of $60 a month would take just over four years to pay off. Over that time you would pay a total of $2904 - nearly half as much again for that $2000 purchase.

Independent earners on $45,000 will receive an extra $19.04 a week from their tax cut. While an extra $19 a month may not sound like much, putting it towards paying off debt can make a big difference.

If it's combined with budgeting that allows you to put an extra $60 a month towards paying off your credit card, you would pay off that $2000 balance in under two years (20 months) and reduce your interest bill by around two-thirds, to just $351.

If you set a time-based goal to pay it off in 12 months at $184 each month, you'd pay just $217 in interest, saving nearly $700 - as well as clearing it three years earlier than if you just paid the minimum.

When trying to pay off debt, closely monitor your income and expenses, McKinlay says.

Having a complete picture of your financial situation will help you create a plan to wipe out debt and get your finances back on track. Ask yourself where you could reduce expenses to come in under your disposable income. Examples could include shopping at cheaper supermarkets where you pack your own groceries, using public transport instead of driving, and making lunch instead of buying it.

Think about whether you really need your Sky TV, expensive mobile phone plans or magazine subscriptions. Often you can opt for a less-expensive mobile phone plan which could save you money each month or use your local library and read the magazines there.

Another way to control your spending is to withdraw what you have budgeted to spend each month in cash, McKinlay says. This way you'll know exactly how much money you have to spend each day.

Prioritise your debts and focus on paying off the ones with the highest rates first. Avoid late fees to ensure they're not adding to your debt - in credit reporting agency Dun & Bradstreet's latest survey, 51 per cent of Kiwis admit to letting their bills become overdue.

Explore options for lower credit card interest rates. McKinlay advises people to call their lender's customer service department and let the representative know they are shopping around for better terms.

If you've received a pre-approved offer for a credit card with a lower rate and are thinking of switching, let them know and see if your current lender can meet it.

"The credit card market is very competitive today, and you may find this simple tactic can lower your rate by at least a couple of percentage points - often more," says McKinlay.

Debt consolidation may potentially be an option, but be careful of unscrupulous debt consolidation "specialists" who offer you the moon and leave you in worse financial shape than when you started.

You could also look at using the equity in your home to consolidate debt, but only if you're spending less than you earn each month and are sure that once you have paid off your current debt, you won't revert to the same bad habits that got you into trouble in the first place.

Filing for bankruptcy should only ever be considered as a last resort. The process is lengthy, complex and expensive. You must comply with onerous requirements and it leaves a significant black mark on your credit record for 10 years.

The Budget Basics website www.budgetbasics.co.nz has a number of helpful tools and resources that will help you plan your budget and manage your debt problems, including a debt calculator, debt worksheets and savings advice.

WORK OUT YOUR DEBT TO INCOME RATIO

To calculate our debt to income ratio, first add up your total monthly income.

Once you've done that subtract your monthly rent or mortgage payments, which will leave your total disposable income.

Next, add up all your minimum monthly debt repayments and divide this number by your disposable income.

If your debt to income ratio is greater than 20 per cent, then you may have a debt problem.

If you think you may be in debt trouble, ask yourself the following:

1 Do you avoid opening your bills or looking at credit card balances?

2 Do you usually only pay the minimum balance on your credit card statements?

3 Do you sometimes pay your bills late or miss payments entirely?

4 Do you use credit cards or store credit to buy things because you don't have the money to pay for them?

5 Is the bulk of your wages or salary largely spent before you get it?

6 When you enter into a hire purchase agreement do you usually choose the longest payment period available to make the payments more affordable?

7 Have you topped up your mortgage to pay off your consumer debts and now find that you have run up more consumer debt?

8 Does paying off your debt eat up more than 20 per cent of your take-home pay (excluding mortgage or rent payments)?

9 You don't have any savings to fall back on in the event of an unexpected bill?

10 Do you spend more time worrying about your debts than paying them?

If you answered "yes" to five or more of these, you are probably already deeply in debt. That could pose a financial risk.

If you need to speak to someone about your debt problems try the New Zealand Federation of Family Budgeting Services - www.familybudgeting.or g.nz or your local Citizen's Advice Bureau.