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How to consolidate debt sensibly (i.e. dealing with the post-Christmas hangover)

The tinsel has been packed away, Carols by Candlelight is a distant memory, the New Year’s Ever hangover has subsided and… the post-Christmas credit card bills have started to roll in. Yep, the back-to-work blues aren’t the only rude shock that January brings – for many, the start of a new year can also mean a financial wake-up call as the dust settles on the spending frenzy of the previous December.

While bill shock can be stressful, it doesn’t have to mean panic stations – with some sensible debt consolidation, homeowners can limit the fallout and set themselves up for a prosperous year ahead. As for that New Year’s Resolution to get up at 5am every day for the gym, well, that might be a little tougher…

What is debt consolidation?

Debt consolidation is the process of rolling all your existing debts into one loan – this could be your mortgage, or a new loan taken out specifically for the purposes of managing your debt.

According to the Australian Government’s Moneysmart website, this strategy may help you better manage your repayments but it could potentially make your situation worse if the interest rate or fees associated with the new loan are higher than what you’re already paying.

Similarly, debt consolidation is not a miracle cure – if you don’t also address your spending habits, it will be hard to make any significant improvements to your financial situation long-term.

To minimise risk and avoid the traps of dodgy lenders trying to woo you with all kinds of unrealistic promises (like that PT at the gym who promised you would look like Chris Hemsworth by February), a good place to start is your mortgage broker. Yep, just like they sorted you out with that cracking home loan, they’ll be able to steer you in the right direct for other types of finance as well.

Consolidating credit card debt

It may be tempting to move credit card debt straight on to your mortgage because of the lower interest rates, but this short-term gain can quickly add up to long-term pain – mortgage terms are much longer than credit cards, so you could end up paying more in interest over time.

Before going down this route, consider a balance transfer. This involves transferring the balance of your existing credit cards to a new card offering zero interest for a set period of time, typically six to 24 months. Zero interest is exactly what it says on the tin – for the period of the offer, you won’t pay any interest. Zip. So you’re just paying down what you owe, rather than the additional interest that’s racking up on your current card (along with the cost of that Panthers membership for your brother-in-law and the Secret Santa gift for your work wife). Considering that credit cards can carry interest rates of up to 20%, you’ll end up paying much less than you would otherwise.

Of course, there’s a “however” to all this (remember, no miracle cures here). This method of paying down debt relies on you having the memory of Rain Man – or at the very least knowing how to use the calendar app on your phone. The second that the zero-interest period ends, you’ll start accruing interest again, so make sure the card is paid off by then. Still got a few dollars owing? Find another balance transfer to a new zero-interest offer with a different provider. You may have to jump around banks a few times to get it paid off, but it’s better than paying exorbitant interest.

Consolidating car and/or personal loans

Larger loans, like car or personal loans, are where debt consolidation can really become effective – but you’ve got to make sure it’s working for, not against, you. If you’re going to roll personal debts into your mortgage, do your homework and have a chat to your mortgage broker about your options.

Firstly, ensure that you’re actually making a saving on your current total repayments. The lower interest rate on your mortgage may make it seem like a no-brainer, but again the longer repayment term of your home loan could come back to bite.

One way to make sure this doesn’t happen? Have a look at your finances and see how you might be able to pay down your mortgage faster – the ultimate win-win solution, because you can make the most of the lower interest rates AND get debt-free sooner.

Meeting your financial goals

Ultimately, the goal here is to get yourself in better financial shape. Debt consolidation can take many different forms, and some may suit you better than others. Always consider your personal circumstances and get individual advice from your mortgage broker before making any big decisions.

While debt consolidation can help to alleviate some financial stress, if you’re doing it more than once there’s probably a bigger conversation to be had about how you’re managing your finances – which means it’s time for a good, hard look in the mirror. Yep, it’s not always pleasant, but confronting those issues head-on means the only thing you’ll be dreading next January is that drill-sergeant PT at the gym telling you to drop and give him 20.

The material on this website is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances, and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.

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