How to use credit wisely

Budgeting

Understanding debt and using it wisely can help create a better, more fulfilling life for you and your family and can steer you towards a more stable future.

When used and managed carefully, debt enables you to:

• build a credit history
• buy a house
• send yourself or your kids to school
• track and manage your spending

However, for Australians who struggle with debt, the financial future feels uncertain at best. It's overwhelming, nerve racking, and it can be difficult to know how or where to begin to get back on the right track. If this sounds like you, follow this step-by-step guide to getting out of debt.

Getting out of debt

It takes commitment and consistency, but the rewards are worth it – both financially and emotionally. People do it every day, and you can too. Here are 10 smart steps for tackling your debt.

• Curb Your Spending: Freeze unnecessary spending while you assess the problem and make plans to get out of debt. Cutting spending can come in many forms. It may mean passing on buying big-ticket items, or it may mean bringing lunch to work or school rather than eating out every day.
• Assess Your Finances: Understanding how much debt you've accumulated is the first step towards reducing it. Use our Debt Checker Calculator to determine the total amount of your debt. It can be difficult to confront that total, but it's critical that you do.
• Set Your Goals: Set a big goal. Pay off your debt in three years and then break this goal into a series of smaller ones that will help you reach the finish line. Use our Income and Expense Cash Flow Worksheet to help get you there. You can even get your loved ones to participate and then motivate each other until you reach your goal.
• Create Your Plan: Put the plan for reaching your goal on paper. The Debt-to-Income Ratio Worksheet and Debt Goal Worksheet may help you set targets for monthly expenses such as utilities, groceries, medical costs, household needs and transportation. Set realistic targets and then try to spend even less. Make hard decisions about how to squeeze more of what you earn from your budget to pay off your debt. Don't forget to budget for the unexpected, such as car problems or emergency medical treatment.

• Track Your Spending: Using the plan you've developed, track your spending carefully so you can look for additional ways to save. The more money you can apply to your debt each month, the sooner you should be out of debt.
• Understand Interest and Late Fees: Know your interest rates and what the late fees are on all of your debts. Avoid late fees to ensure they're not adding to your debt, and explore options for lower interest rates. If you can't make a payment, call the banks or companies you owe and talk with them about your situation. If you don't understand or aren't familiar with a debt term, you can refer to our online Glossary for help.
• Pay More than the Minimum: Understand how paying more than the minimum can be a critical first step in reaching your goals. This is particularly true for credit cards, though it may also be useful for paying other loans, such as those used to buy furniture, appliances, or electronics.
• Reward Success: Commit to achieving your goal and figure out what's going to keep you motivated to stay on track. Consider sharing your goal with a "Debt Coach" and asking him or her to help "keep you honest" by checking in regularly to see how you're doing.
• Be Patient: It probably took you time to get into debt, so acknowledge that you're not going to get out overnight. Keep yourself motivated. And remember, getting out of debt will change your outlook on life. It's worth the hard work.
• Pay Your Most Expensive Bills First: Interest can add up quickly on debts of any size. Be sure to focus on paying off the ones with the highest rates.

Rewards of Budgeting

As you work towards your goal, increasingly, you'll be able to plan, save for the future, and build wealth rather than worry about paying for things you bought long ago.

While some of the benefits of getting out of debt are quite tangible, the biggest rewards you will receive are those that are difficult to measure with a calculator.

Developing good money management skills will provide you with access to lower interest rates, more favourable loan terms, or allow you to work towards a goal such as home ownership. While all those benefits are important, it is the intrinsic value of the experience when you pay off your debt that makes it worthwhile.

In short, while it might be easy to measure the value of paying off your debt by what else you can do with your money, the most valuable asset you'll receive is the freedom that a debt-free life gives you. Living without debt will allow you to focus on the most important people in your life – yourself and your family.