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Since the recession, New Zealanders have been reducing debt, with Reserve Bank of New Zealand figures showing consumer credit slowing considerably over the past three years. But avoidable high-interest debt is still costing New Zealanders millions of dollars a year — that's dumb debt.
Before deciding to take on debt, it's important to work out how much it will really cost you over time. It's more than just the amount of the loan or hire-purchase — the interest can add up faster than some people realise.
For example, if you buy an $800 couch on your credit card, with an interest rate of 18 percent, and you pay just $20 a month, it will take you more than five years to pay it off and cost more than $430 in interest. That's more than $1230 in total, almost 50 percent more than the cost of your original purchase.
Increasing the amount you pay each time can make a big difference. If you paid $50 a month, you would be in the clear in less than half that time — around 19 months — and pay a lot less in interest, around $120.
To avoid interest costs growing, the best-case scenario is only to use your credit card if you know you can pay it off in full within the interest-free period. Alternatively, put aside some money every week so you can use cash instead.
For those already facing a mountain of debt, find out what interest you're being charged and pay back the highest-interest debt first. Once you've paid off one debt, see if you can add those repayments to your next highest-interest bearing debt. It will help you become debt-free faster.
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