DEBT

Drilling down on the different types of consumer debt

We focus on consumer debt, which includes things like credit cards, consumer finance and buy now - pay later

1. CREDIT CARDS

Almost half of New Zealand's adult population (43%) has a credit card. 1-in-3 adults have an outstanding balance every month, meaning they are being charged a high amount of interest every month. 

Millennial's are the most likely to default on a credit card payment, accounting for 50% of credit card defaults, according to Credit Simple.

Some people like to have a credit card for the rewards they offer such as air points and cash. If you're managing to repay your credit card every pay day then that’s great, as long as you've only spent what is allocated in your budget. 

"It's not my money"

If you don't have a budget and you're applying the above – on average, you will spend 65% more. Why? Because its not your money. It's very easy to swipe the card and not second guess the purchase. If instead, you were using money in your savings account, you would second guess the purchase. 

Ask yourself 'what am I sacrificing in the future to purchase this item now?' It's your money and you will make better decisions and spend less. The best option is to set up an automatic payment to the credit card every pay day and chop up the physical credit card – eliminate your consumer debt forever. 

"Ask yourself 'what am I sacrificing in the future to purchase this item now?'"

2. STUDENT LOANS

Almost 1-in-5 New Zealanders has a student loan, totaling approximately $14 billion.That number sounds alarmingly high, but there's no reason to panic. As long as you're living in New Zealand, there is no interest on student loans.

That means the most logical course of action is to let wages / salary student loan minimum repayments chip away at the balance, rather than making any extra payments.

Reasons for making an effort to repay your student loan faster may include; if you're planning to move overseas, concerned that interest will be reintroduced, or want to feel the satisfaction of smashing the debt.

3. CONSUMER FINANCE

Approximately 1-in-10 people have a hire purchase or personal loan and roughly 1-in-20 have some other form of consumer finance, according to interest.co.nz. Interest rates can vary anywhere between 8% to 22%. This is a debt we really want to repay and close forever. 

Unfortunately, it has become common to borrow for a vehicle, because people don't have the discipline to set money aside and end up purchasing a vehicle well above their means. What they don't realise is that they pay twice as much for the vehicle by using a bank loan or vehicle finance company to borrow funds to purchase the vehicle. 

"You're temporarily borrowing, usually because you can't afford the immediate payment"

4. LOANS FROM FAMILY OR FRIENDS

It is quite common to borrow money from a friend or family member, but this sort of lending can create toxic relationships. It has the potential to ruin relationships no matter how close the person is. 

Why? Because the person borrowing the money will usually feel they owe the lender forever for the favour they did. If the arrangement isn’t clearly explained each side can get argumentative.

Financial Advisor Dave Ramsey recommends not entering into an agreement to loan or borrow or give a loan to a family member or friend. The best type of help you can give is advice and helping them to become better with money. 

"Borrowing from friends and family can create toxic relationships"

5. BUY NOW PAY LATER - OXIPAY, AFTERPAY AND PARTPAY

The newer form of credit, these facilities are generally targeting the younger members of society, which is troubling when we are trying to teach good money habits and behaviours. 

These options can look more attractive, with some companies offering no set up fee and no interest. Interest only occurs on late payment fees and fees for defaults, so this is becoming a very common way of making purchases. 

"Purchases look more attractive"

As an example, with 'buy now, pay later' a $200 item might have a payment of $50 required over 4 or 6 payments, making the purchase look more attractive, because you are temporarily borrowing and the payments are smaller. 

But, using these facilities creates negative money habits. They are all different forms of credit facilities – you are temporarily borrowing, usually because you can't afford the immediate payment. 

You're most likely hiding it from your spouse, and you're more likely to purchase another item, over-committing yourself and becoming liable for late payment fees. 

BOOK COACHING

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