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Published January 21, 2023

Dealing With Debt and its Impact on Your Financial Health

You know what debt is, but you might not realise its true cost.

Australians have the fifth highest level of household debt compared to the average household disposable income in the world – at $86,392. This is more than double the amount of household disposable income available ($42,554) in Australia. What does this tell us? We spend more than we have. 

Debt has become normalised. There are more than 13 million credit cards in Australia, with some people having more than one. In 2021, the average balance per credit card was $2,800. This was lower than in previous years, for instance 2019, when the average balance sat at $3,270. 

Let’s preface something important: Debt isn’t innately good or bad. Yes, there are better types of debt than others, but it’s your relationship with debt that matters. 

If you use credit and pay it off before the interest kicks in, you’ll benefit from debt. You proved you’re responsible when handling credit and maybe even earned reward points. Alternatively, if you’re repaying the credit and the interest, and dealing with the stress of carrying debt, it’s doing more harm than good. 

As with all things financial, you have to be proactive and self-aware. Navigating your finances can be a wonderful journey of self-improvement. Even if you’re not where you want to be, there’s great power in momentum and the right money mindset. 

Paying off debt can be a skill you carry for life. It’s all about your perspective. 

So, what is debt? 

You can have credit but not be in debt. For example, you might have a $5,000 line of credit but not use it. Therefore, you don’t have debt until you make a transaction on your credit card. 

Simply put, debt is the money you owe to a bank, financial institution, or person (if you borrow money through family or a friend). It’s always better to pay off debt as fast as possible, to avoid interest and fees. 

Used strategically, debt is a tool that gives short-term flexibility and a stronger financial position long-term. Debt can help you achieve your biggest life goals – going to university, buying a house, starting a business, travelling the world, etc. 

Debt, income, expenses, savings, investments – your financial life 

Think of your finances in a holistic way. Debt is just one part that contributes to your financial health. Each financial pillar deserves your attention. Spend time understanding, reviewing and recording all your numbers: 

  • How much you earn each month. 
  • What you spend and how your cash flows (in and out). 
  • How much you save and its percentage (of your income).
  • What you invest and where. 
  • How much debt you have and the speed at which you’re repaying it. 

By knowing your numbers, you can work out your debt ratio. This will change every month with your cashflow. Dedicate one or two hours a month to review your finances.

Debt is also relative. What’s important is your debt-to-income ratio. This figure compares your total debt to your overall income. Weigh up your debt and expenses against your income, savings and assets. If you earn $60,000 per year and your credit card debt is $2,000, you’re in a good position. But that same $60,000 salary with a $20,000 debt is a different story.  

Debt is a decision-maker 

Your debt tells a story about your ability to handle money. Remember, debt itself isn’t ‘bad’ – especially if you pay it off on time and have consistent income, savings and assets. 

Debt does impact your credit score, both positively and negatively, which paints another picture – of your overall credit worthiness. 

It’s always better to pay off or pay down your debt before applying for additional credit. 

Yes, you need to be wary of debt and implement best practices to avoid worst-case scenarios. But there’s an opportunity to flip the script and focus on debt as a way to create financial flexibility and access those big ‘life’ purchases. The car, home, business, trip, education, etc. 

The way to leverage debt to make these goals possible down the track is to develop good debt habits now. Look at debt as an opportunity to create leverage in the future. 

A positive track record with debt opens doors. 

Get interested in your interest rate 

There isn’t one standard credit card for Australians. It depends on who you bank with, what products they offer, the terms and conditions, and your history as a customer. 

Some people prefer lower fees than interest rates. Other consumers are happy to pay a higher interest rate to access rewards points. 

Westpac’s ‘Low Rate’ card has a 13.74% interest rate. NAB’s StraightUp card charges no interest. The ANZ First card charges 20.24% interest on purchases. So, do your research and know what’s most important to you in a credit card. 

If it’s a personal loan, a car lease, a mortgage or your HECS debt, you need to know how (and how much) the interest is. There’s always room for renegotiation or shopping around, especially with consumer products. 

Common types of debts in Australia 

Mortgages 

In 2021, there were 6.2 million households with homeowners, making mortgages the largest debt. The mortgage is the difference between the initial deposit and the total house price. 

Credit cards 

With more than 13 million credit cards in Australia, this is a common type of debt. 

Car loans 

Approximately 2.7 million Australians have a car lease. A new car is a large expense, so it’s common for people to make a partial payment and enter a lease. The average lease is four years. It operates as a personal loan. 

Personal loans 

Banks and financial institutions provide loans for people who need more than a standard credit card. Personal loans can be used to pay for a trip or emergencies or to start a business.  

HELP loan 

There are about 2.9 million people with student loan (HELP) debt, such as FEE-HELP or HECS-HELP. The Higher Education Loan Program (HELP) is tied to inflation, which is only going up.  

Tax (ATO) debt 

While the majority of ATO debt is owed by small-to-medium sized businesses, individuals who are unable to pay their bill can enter a payment plan. During the pandemic, lodgements and payments rules were relaxed to ease the pressure on Australians. More individuals took advantage of this support. 

How to get rid of debt? Use the domino method. 

As Aussie’s finance guru, The Barefoot Investor, says: ‘Domino your debts.’ 

First, line up all your debts and put them in order (smallest to biggest). Next, speak with each lender and negotiate lower rates or fees. 

Then, with the best possible outcome for each debt, focus on the smallest one in your list. Pay that off first and move down the list. Make sure you also pay the minimum for each debt to avoid fees or marks on your credit score. 

As you work through the list – knocking each debt down like a domino – you’ll grow your available money to dedicate to the next debt. The fewer minimum repayments you have, the more resources you can dedicate to your priority debt. 

Once you see that first domino fall (the smallest debt), you’ll start to feel the liberation and momentum. Don’t forget to celebrate each win. You’re not just paying down debt. You’ll be wiser and more experienced to navigate your future finances.

About the Author

Amanda Smith

Amanda Smith is a freelance reporter, journalist, and cultural commentator. She covers culture + society, travel, LGBTQ+, human interest, and business. Her work has appeared in outlets such as The Guardian, Business Insider, VICE, News Corp, Singapore Airlines, Travel + Leisure, and Food & Wine. Amanda has written stories about planning for retirement for Business Insider, the connection between identity and money for Refinery 29, and the evolving cryptocurrency space for multiple verticals. A keen observer of humans, subcultures, societies and worlds, Amanda's words challenge perceptions and help bridge worldviews. Amanda splits her time between Adelaide, South Australia, and New York City.

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