The debt trap: Get your finances in order

Is most of your debt on a credit card?

The BNZ Standard and Gold cards, which are fairly typical, charge an interest rate of 19.95 per cent. Take out a personal loan with the same bank and you'll be paying 15.95 per cent. That's a saving of $390 in total interest paid on a $5000 debt, paid off at $200 a month.

Do you usually pay the minimum amount on your credit card each month?

A $5000 debt paid off this way would take nearly 10 years to clear and cost you $6137 in interest at the ANZ's rate of 20.70 per cent.

Do you go into overdraft without planning to?

Every time you go over your agreed overdraft or bounce a cheque, you're charged $20 to $25, depending on your bank. You'll also be charged a penalty rate of interest. At the ASB, for example, a secured overdraft is charged at 14.75 per cent a year, but this jumps to 21.75 per cent for an unarranged overdraft.

Have you given up putting money aside for holidays or your retirement?

Only 1 per cent of New Zealanders will retire on more than $60,000 a year. You don't need to be rich to end up in this club. You just need to be financially savvy. Compound interest means that over the long term sensible savers can build up a tidy nestegg.

Do you shop around to get the best possible deal on your bills?

The average person could save hundreds of dollars a year on their utility bills, insurance policies, mortgages and loans by shopping around on a regular basis. Economising on your use of utilities use pays dividends as well - especially when it comes to mobile phone bills that can soon eat a hole in your pocket. There are useful utilities calculators on www.powerswitch.org.nz and www.consumer.org.nz (see links below) that help you work out how much you can save.

Do your mortgage and other debt repayments make up more than 35 per cent of your gross income?

If they do, then you could be tipped over the edge by an unexpected cost such as an expensive dentist bill or serious work on your car. Geoff Bawden, chairman of the Mortgage Brokers' Association, says anyone with this level of debt ought to review their finances very carefully.

Is 90 per cent or even 100 per cent of the value of your home mortgaged?

If the housing market drops by even 10 per cent you could find yourself in negative equity, which means you owe more to the bank than your home is worth. History shows that housing markets drop once or twice a decade.


Warning signs:
* Spending more than 20 percent of your net income on credit card interest payments.
* Borrowing money to pay off other debts.
* Paying your bills on time, but running out of cash between paychecks.
* Using your credit card to pay for necessities because you don't have the cash.
* Paying only the minimum payment on your credit cards. As a rule of thumb, if you can't double the minimum payment, you've got a problem.
* Getting turned down for a consolidation loan. It means you've already over-extended yourself - your debt ratio is too high.
* Refinancing a loan to reduce your monthly payment. If you're 24 months into a 48-month loan and you're looking to refinance because you're over-extended and need to lower payments, it's a definite warning sign.
* Needing a co-signer. If the lender requires a co-signer to make this loan creditworthy, you're over-extended. However, if you lack a credit history, this wouldn't necessarily apply.
* Financing your vehicle for six or more years. You're doing it to lower your monthly payment, rather than focusing on reducing your debt.
* Consolidating your loans but not closing the accounts where those loans originated. You're afraid to do so in case you get into trouble again. If you don't close off those other credit cards you're simply going to compound your problem.
* Counting on the next "big deal" to see you through your financial trouble. This includes inheritances.
* Carrying more than four credit cards. There's no reason to have more than two credit cards.
* Waiting until near the end of your credit card's interest free period to pay, or requesting a higher credit limit.
* Hiding purchases from your family, or fighting with your spouse about how to deal with your situation. Financial problems and domestic problems go hand in hand.
* Depending on parents and friends to bail you out.

Source: FundSource investment research.