What to do when drowning in debt
EXCLUDING DEBT ASSOCIATED WITH RENTAL PROPERTIES, HOUSEHOLD DEBT IS NOW AT 126 PER CENT OF DISPOSABLE INCOME, COMPARED TO 118 PER CENT IN THE PREVIOUS PEAK OF 2009, AND 109 PER CENT AT ITS MOST RECENT LOW POINT IN 2012. IN 1999, IT WAS 75 PER CENT.
New Zealanders are more in now than ever before, which raises the question: didn’t the global financial crisis teach us anything? Susan Edmunds reports.
Christchurch librarian Philip Creed, right, knows what it’s like to be stuck in consumer debt.
Over the years he has struggled with a credit card balance that was tough to shake.
There was the $3000 on a Mastercard, an American Express card with a balance that reached $3400, a Q Card, and a Visa used for everyday expenses that reached its limit of $1000.
For years, he kept up with the minimum payments on the bigger cards, but little more.
He paid between $100 and $200 a month on each the Mastercard and the American Express.
“Chipping away at the total is not enough.
You need big lump sums to get rid of it and not many people could afford that,” Creed says.
The Q Card was used to install an HRV system in his house, which cost about $3000. He paid that amount off but did not realise an account fee was still being charged, which compounded up to a total of $70. “If I didn’t pay it they said they would take possession of the HRV system.”
Creed only found a way out of his debt when his father offered an interest-free loan of $6500 to clear the balances.
He is now paying that loan back at a rate of $100 a month. The American Express card has been cancelled and the others now have zero balances.
“I tend to avoid using the credit card now unless I really have to.”
Creed says he has learnt for the future that it’s important to keep careful tabs on the amount of credit being offered. His bank kept suggesting he increase his credit limits or take on more debt, even though it had no updated information on his income.
“It comes down to discipline as well, not using the card when you don’t have to.”
Auckland mother of four Natalya Purchase can remember being in tears walking through the supermarket, wondering how she would ever get out of debt and whether she could provide for her kids.
She says people should not assume it’s all bigspending consumers who are taking out loans.
As a teenager and through her 20s, she regularly took out hire-purchase agreements and always paid them back on time. She had a great credit rating and had never considered that she might run into trouble.
Then when she had small children, her marriage got into trouble. “Every time he would leave, he would leave me with no provision and no income. I would find myself, for up to seven weeks at a time, with no income, having to live off credit cards. Very frugally, but still off credit cards.”
She couldn’t work and her debt levels quickly got out of control.
“I had no money to pay for anything. It was a really hard time. I avoided phone calls until everything went to [debt collecting agency] Baycorp. I had Baycorp ringing every single day.
“There was nothing I could say to them. I couldn’t say I’d pay $10 a week because I didn’t have $10. I only had $30 a week left for food. It was a horrible time in my life. I rang about a debt consolidation loan, but they couldn’t help me.”
It wasn’t until she was able to get her children into daycare and start her own business as a makeup artist that she started to see a way out. Working from home, she filed a tax return that resulted in a $4000 refund that allowed her to tackle her debt.
The rest of the $10,000 she owed was paid off slowly over time. “I would never ever go back into debt like that again,” she says.
“You never know when life is going to throw you a curveball and you can never actually be prepared for ending up in a massive amount of debt, but my advice would be to limit things like hire-purchases. Live your life as if, tomorrow, you don’t know if you’re going to have any money.”
WHAT’S THE PROBLEM?
Data shows New Zealanders are taking on more debt – and economists say, if economic conditions change, that could be a concern. Reserve Bank data shows that Kiwis now owe more than they ever have.
Excluding debt associated with rental properties, household debt is now at 126 per cent of disposable income, compared to 118 per cent in the previous peak of 2009, and 109 per cent at its most recent low point in 2012. In 1999, it was 75 per cent.
Compared to GDP, household debt has returned to the levels last seen at the time of the global financial crisis.
Infometrics chief forecaster Gareth Kiernan says most of the increase in household debt over recent years has been housing-related.
“It’s a function of the massive appreciation in property prices in Auckland and, to a lesser extent, elsewhere,” he says. “The reason that households have been able to take on more debt is that debtservicing costs have been low due to low interest rates. However, an interest rate rise of, say, 1.5 percentage points would potentially place financial stress on a significant number of households.”
Kiernan says New Zealanders seem not to have learned that the economy, housing market and labour market are not always one-way bets.
“The fact that the housing market is now slowing should limit further growth in household debt, but it also means that people who have bought [property] reasonably recently won’t have the same proportion of equity in their property as earlier buyers,” he says.
“They could find themselves in a vulnerable position if house prices decline and interest rates rise – possibly unable to service the mortgage and left with little or no equity in the property.”
Economist Shamubeel Eaqub says our national debt levels are a worry.
Not only has our debt crept back up again but he says it’s likely to be even more concentrated, with a smaller number of borrowers now than during the global financial crisis. All it would take to turn it into a crisis is a drop in employment that would leave more people struggling to meet their repayments.
“We’re back to our bad old habits. We’ve bought houses, renovates and also bought expensive cars and bits and pieces – you can see that with the record number of vehicle registrations.”
WHEN IS DEBT AN ISSUE?
“The figures don’t tell the full story of the really destructive debt we see at a household level,” retirement commissioner Diane Maxwell says.
“Some people have debts they can manage, they’re paying a low interest rate and it doesn’t impact their day-to-day life. For many others, it’s expensive debt at a high interest rate; the payments make life hard and it takes years to pay off a purchase that took 10 minutes.”
Debt can mean different things to people, depending on their income and assets, she says.
“It’s either an enabler or it is crippling. People need to look at how long their loans will take to pay off and what they cost to borrow. We enter into debt without knowing the answers to those questions, and the speed at which we can get our hands on credit means we just don’t take the time to work it out,” she says.
“It matters what we are going into debt for. Is it an investment in our lives? We work with people who are slowly paying off big debts and can’t remember what they bought. It was just lots of little things that added up to a monster credit card bill – a meal, a movie, shoes, a present – and they feel they’ve got nothing to show for it except a credit card statement that frightens them.”
If consumer debt has started to feel like a huge weight, Maxwell says, people need to be aggressive about paying it down. “Pay as much as you can, as regularly as you can, to knock into it, with little rewards as you go.
“I asked a friend, who has recently finished paying off a big debt, how it felt and he said, ‘It’s a huge burden off my shoulders, it has been lifted off me. I got myself out of a vicious cycle and now I don’t wake up in the morning thinking about it.’”
Financial coach Shula Newland says a person’s money personality drives their approach to debt.
People who are “spending avoiders” enjoy spending the money and avoid any issues that go with it. “They don’t feel that initial stress that other people might. They don’t tend to like to think about money too much and it all starts to snowball.”
Those who are “hoarders” are more likely to avoid debt and focus on saving, because they get a feeling of security from having money available.
People at all income levels can get stuck in a debt cycle, where they keep taking on more and more, Newland says. “You could be on a reasonable income and still be living hand to mouth because of that debt.”
She says people who want to get out of debt usually have to fundamentally change their habits.
They need to work to a balancing budget each week, keeping on top of their ongoing expenses while paying down debt and putting money aside to avoid the need for debt in future.
Too often people prioritise throwing big chunks of money at their debt each payday, Newland says, but that leaves them unable to cover the basics, and they end up taking on even more debt. Evette Johnson, right, from
Auckland took an entrepreneurial approach to her debt. “Getting into debt was easy. I had a reasonable job and good credit.”
But while she was in her 20s she racked up $10,000 in loans. “Every time I got a debt consolidation loan, I would add to it with a new TV or by just paying off my Visa bill, as well as shoes, makeup and sometimes to pay the bond for houses while I was flatting.”
Finally, Johnson had to get creative and started a sideline retail business to help pay down the debt.
“I created vast quantities of things to sell and eventually it was done – I produced toys, clothes, food, art, even decorated potted plants. Anything I could make, really.”
We’re back to our bad old habits. We’ve bought houses, renovates... and also bought expensive cars and bits and pieces – you can see that with the record number of vehicle registrations.
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