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A DEBT binge by households is putting people in dangerous financial positions and leaving them unprepared for future interest rate rises.

Despite falling interest making it easier to pay down loans, Australian households now owe almost $1600 billion, a 28 per cent rise in just five years, and economists say our personal borrowing levels are among the highest in the world.

The latest Reserve Bank of Australia figures show housing debt is the biggest factor. Meanwhile, people are paying high interest rates – averaging 17 per cent – on almost $33 billion of credit card debt that fails to get repaid every month.

Borrowing experts say now should be the time to pay off debt faster, not increase it, while interest rates remain low.

Prushka Fast Debt Recovery chief executive Roger Mendelson said Australians had not factored in the costs to repay their debts when rates eventually climb.

‘I certainly think there’s going to be an issue when interest rates go up, and anyone who says they won’t is denying the normal economic cycles,” he said.

Mortgage interest rates near 5 per cent have helped fuel the debt spike. Since early 2010 owner-occupier housing debt has climbed 28 per cent to $945 billion, while investment housing debt has jumped 41 per cent to $495 billion.

‘They need to factor in interest rates at 8 per cent, and even that is low historically. If there’s any time to get your household budget into order, now is the time to do it and prepare for bad times,’ Mr Mendelson said.

‘If you lose your job, interest rates go up, unemployment goes up, house prices go down, that’s when people get caught out.’

Australian Credit Management managing director Campbell Woskett said households had enjoyed easy access to credit in the past five years amid a growing number of borrowing options including more credit cards, debt-consolidation lenders and payday lenders. Another newcomer, peer-to-peer lending, is in its early stages.

Mr Woskett said most people aged under 40 could not remember Australia’s last recession in the early 1990s. ‘Maybe some older folk may also have dusty memories,’ he said.

‘Then in 2008 we had a GFC. The government of the day built some schools as part of the stimulus package, while many people received a bonus $900 to go shopping. I recall younger workers saying to me ‘hey, if this is a crisis, bring it on’.’

Mr Woskett said in the past six months more people appeared stretched financially. ‘There will always be debt, but excessive debt can hurt people. It can set them back financially, it can damage their individual confidence and it can shatter families,’ he said.

Oracle Lending Solutions director Angelo Benedetti said his firm was turning away people every month because they wanted to overstretch themselves with debt.

He said he had received a lot of inquiries about personal loans ‘but unfortunately for a lot of people it’s about debt consolidation’, combining several out-of-control credit cards into one lower-interest loan.

‘Debt reduction should be the number one thing at the moment. Interest rates will definitely go up in the future and it’s important to create a budget and build equity in your property.’

Then, if rates rise or you hit an unexpected financial hurdle, you have ‘room to move’ with your bank, Mr Benedetti said.

HOW TO MANAGE RISING DEBTS

1. Keep alert to what is happening in the local economy and how it might affect you.

2. Don’t take your source of income for granted. Ask yourself what happens if it disappears.

3. Define what is really necessary to buy, and limit your consumption.

4. Don’t over-borrow. Try to have decent equity in major purchases such as motor vehicles.

5. Check your own credit file for free on websites such as mycreditfile.com.au and experian.com.au.

6. Keep in regular communication with your creditors – it always helps to talk with them

7. Understand that being in debt is not forever, and you can get back to a stronger position

8. If you are in serious and overwhelming debt, get advice from a trusted financial counsellor or adviser and make a plan to manage it.

Source: Australian Credit Management


Posted by Anthony Keane and Sophie Elsworth News Corp Australia Network on 4th April, 2015