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Good debt, bad debt: How to borrow smart

December 4th, 2015

Don’t sweat over personal debt – there are clever ways to manage each type of credit.

Aiming to be debt free is always a sensible goal. But we often need credit to achieve personal goals like buying a home or car.

In fact, debt is very much a part of modern life. A whopping 69% of Australians have a credit card. One in three has a home loan. And a further one in ten has either a car loan or personal loan, according to RFi Group.

It sounds like we’re juggling multiple types of debt. The thing is, not all debt is created equal.

Keep a lid on ‘bad’ debt

Credit card debt for instance is often described as ‘debt’. That’s because it’s typically used for purchases of no lasting value like dining out, a holiday, and even regular groceries.

Unlike other types of debt, there is no set end date for credit card debt, and sticking to the minimum repayments could see you take years to pay off long-forgotten purchases.

That’s why it makes sense to keep a lid on card debt. Start by looking for a low rate card with zero annual fees. They do exist. Then, aim to clear the slate before monthly interest charges apply, or at least pay off more than the monthly minimum.

Your home loan – simple ways to get ahead

As the good guys of the credit world, home loans have a lot going for them. They come with super low rates; they let you own your home rather than pay rent; and the loan is backed by a property that will rise in value while the loan balance reduces.

Even better, there are simple ways to pay off your home sooner. Extra repayments and offset accounts can play a key role here. Or, try tucking spare cash into your loan instead of using a separate savings account. The cash comes straight off the loan balance, reducing interest charges and allowing more of each regular repayment to whittle away the principal. If you need cash, a redraw facility offers easy access to your money.

Borrowing to invest – financially savvy debt

An investment property loan ticks plenty of boxes. This type of credit lets investors enjoy low interest rates plus capital growth on a rental property. It’s tax-friendly too as the interest on an investment loan can normally be claimed on tax.

If you can comfortably handle the repayments, this type of debt can be a useful tool to grow personal wealth.

Necessary debt

When it comes to buying big ticket items like furniture, appliances or a car, most of us need a loan. The problem is that unlike a home or investment property, these items don’t hold their value.

A money smart approach is to look for a low rate loan with no ongoing fees. Then aim to pay off the loan at turbo-speed by partnering with a lender who won’t slug you with penalty charges if the loan is paid off sooner.

To learn more about borrowing in a financially savvy way, call ME on 13 15 63 or visit mebank.com.au


Members Equity Bank Limited ABN 56 070 887 679 Australian Credit Licence 229500. Terms, conditions, fees and charges apply. Applications are subject to credit approval.

This content was provided by Members Equity Bank. The views expressed are not necessarily those of First Super. First Super has shares in Members Equity Bank.