How to avoid credit card debt and why having a healthy credit score is important

Image: iStock/Nuthawut Somsuk
This article is sponsored by CUA.  »

In the final instalment of The Finance Glow Up, a free online seminar made in partnership with financial provider CUA, Laura Byrne, creator and host of the Life Uncut podcast and ToniMay creative director, and Emmanuel Davatzis, one of CUA’s money experts, discussed the topic of financial stability. During this seminar, the two spoke about what you can do to consolidate your credit card debt and keep your credit score healthy, while making sure you’re still able to add to your savings.


Consolidating your credit card debt

When it comes to credit card debt, Byrne has had plenty of first-hand experience, “If you live in Sydney there’s a good chance you don’t have a home loan but you do have a credit card debt. Because everything is so expensive here.”

Byrne explained that when she was starting out her business she got a $5,000 credit card, which she maxed out quite quickly. At the time, she wasn’t earning enough money to get on top of the debt, and pay off her interest. What she didn’t realise was that there are options when you get into that situation. “When I was in my mid-twenties and I was starting my business,” Byrne explained, “I didn’t think anyone would give me a loan.”

At her wits’ end, she spoke with her bank, who helped to set her up with a personal loan that allowed her to pay off her debt. Her monthly personal loan repayments were so much less than what her credit card repayments were, and significantly more manageable.

Managing finances can become very stressful, so you’re best to get professionals involved sooner, rather than later. If you’re currently being crushed by credit card debt, Byrne recommends heading to your financial institution of choice to sit down and figure out a plan of action.


Don’t let your loan application affect your credit score

When it comes to taking out a loan, Davatzis noted that there are two conversations that need to be had; an informal one and a formal one. The informal conversations involves meeting with a financial expert who will do an informal borrowing calculation where they will go through your expenses, outgoings and savings to give you an exact figure for how much you can borrow.

Once you’ve done the informal step and want to move ahead, you can undertake the formal one and apply for a pre-approval application. Davatzis does warn that if you choose to go the formal route, without the informal one, make sure you’ve already chosen your institution. Don’t hop around to three or four banks while getting pre-approvals, as that will affect your credit score.

Managing your debt so it doesn’t affect your credit score

As all institutions share credit scores, they have access to 24-months of your repayment history, and will be aware of any defaults – a failure to pay an expected debt on time – that are attached to your name. These defaults can negatively affect your credit score, along with your ability to apply for a loan.

Davatzis noted that the most common default involves renters who’ve recently moved to another property missing utility payments because they’ve forgotten to update their billing address. If you do have a default, you’re able to pay it out and get a letter from the relevant institution confirming the payment. In Davatzis’ words, “It’ll be like the default had never happened.”

When it comes time to making your bill payments on time, Davatzis emphasised the importance of aligning your repayment cycle with your salary cycle. Using himself as an example, Davatzis explained that since he gets paid fortnightly, his repayments are also scheduled to be made fortnightly. A simple tip that he recommends for keeping on top of your repayments is to set up a direct debit, so you know they’re always going to go through on time.

While this system works for Davatzis, not everyone is paid on a set schedule – both Byrne and her partner both have a more sporadic payment cycle due to the majority of their work being contract based. Despite this, they’ve structured their savings and are still able to make payments on time. Byrne and her partner put away a set percentage of every job payment that comes through for them, “That works well for us because we know there’s always going to be money in [that account], and it’s money we never touch.”

Byrne also knows from experience how easy it is to be complacent and just stick with the bank you’re already with, never questioning whether or not you’re getting the best deal possible. It pays to look around to see what’s available and what your bank is offering you that can help maximise your finances.


How to save as you spend

During the Finance Glow Up, Davatzis turned to the topic of CUA’s new savings solution, the Savings Top Up. The way that this product works is that every time you pay for something on your debit card or transactional account, a portion of your money will be automatically transferred into a savings account.

Davatzis’ advice for making the most use of this product is to make an average of your transactions over a six month period, and assign a specific amount –ranging from $0.01 to $5 – to be transferred with each transaction. So if you’re making six transactions a day, with a set transfer amount of $1, you’ll be saving $2,190 annually.

To help you get into the habit of saving more, you can try using something like CUA’s savings planner calculator. It’s a helpful tool that you can use make sure you stay on track with your savings,

DOWNLOAD THE TOOLKIT HERE


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