This is part one of Nicole Pedersen-McKinnon’s two-part strategy on how to ditch debt and organise your finances for 2023. It’s a template for New Year success, all laid out in simple steps for you. Stay tuned for part two on Australia’s best-paying products for your savings.
Let’s start with the good news. Because we could all do with some at the outset of a new year, after several tough economic ones.
There are teensy indications that the Reserve Bank of Australia (RBA) may be preparing to pause and stop hitting us with higher interest rates. Its board minutes, released just before Christmas, were intentionally vague but implied the hike cycle was nearly done.
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And we get a guaranteed reprieve this month because the board doesn’t meet in January. Of course, the bad news is that we are all dealing with the legacy of last year.
Eight successive months of rises, to a 10-year-high cash rate of 3.1 per cent, have added $834 to the monthly repayment on a $500,000 mortgage. Variable rate personal loan repayments are, naturally, up too.
Credit card interest rates - in the dirty little secret of the banking world - never went down in the first place and still stand at an average of more than 17 per cent.
So, as you refocus on your finances and look to start fresh in 2023, here are the cheapest, and best, strategies for the lot - your ready-made resolutions to cut your repayments.
The best-value home loans
If you act on just one New Year pledge this year, make it a mortgage refinance.
You DON’T want cheap and cheerful. This is why I highlight below the average variable rate from an authorised deposit-taking institution – so, one that offers a real offset account.
This is 5.82 per cent.
But you can also see in the table below that you could be paying as little as 4.24 per cent. That saving on a $500,000, 25-year loan is $461 a month. While it doesn’t wipe away the damage by the RBA, it sure helps.
Worried money is too tight to qualify for a new loan? No lender will discover this unless they do what’s called a ‘serviceability’ test - including your existing one (assuming you are up to date with repayments).
That means, armed with the deals you can get from the lenders below, you could negotiate a discount that is almost as good. But here’s a tip: fill out an actual ‘mortgage discharge form’ and name a lender to which you want to switch. To prevent that, the lender might even match it.
The cheapest unsecured personal loans
You could drive a car through the gap between the cheapest and average personal loans. And those that are ‘secured’ over an asset are usually done so by cars.
The average rate for an unsecured personal loan, says Mozo, is now 9.87 per cent. This compares with a market-leading rate of nearly half that: 5.15 per cent.
Again, refinancing your loan will dramatically cut your monthly outlay and reduce your budgetary pressures. Your attack plan should be a little more sophisticated when it comes to any credit card debt though.
The longest balance-transfer credit cards
As mentioned above, while the cash rate went down to an emergency level of 0.1 per cent when the pandemic broke, credit card interest rates barely budged. That seriously hurt people carrying over debt from month to month, where – because they couldn’t afford more – they also reduced their repayments to the minimum.
Remember, you often need only pay $20 or 2 per cent a month.
These dual circumstances meant debt grew. So, at the beginning of 2023, it’s time to take charge.
There are multiple credit cards that offer 0 per cent balance transfers for up to 36 months. This, quite simply, allows you to transfer your balance from another card and pay no interest on it for that period of time.
The cards with the longest interest-free periods are detailed in the table below.
The smart strategy is to transfer your balance, divide your debt by the number of interest-free months (say 36) and endeavour to pay this amount off your card in every one of them. Don’t miss that you will not outlay a dollar in interest in that time, so every cent chips away at your debt.
Whatever you do, though, don’t use these cards for new spending, and don’t keep them if you still have debt at the end of the interest-free period.
Unsuspecting cardholders incurring punitive interest rates in both circumstances is how providers can afford to offer such sweet deals.
There is one other card warning too…
The cards with the cheapest ongoing rates
You should be aware that every application for credit slightly suppresses your credit score.
I said you should try to repay your credit card debt within the balance-transfer period. If you can’t manage that, you could take out a second 0 per cent card – and transfer for a further period.
But if you do it more than that, quite besides your score suffering, you will give a prospective new card issuer the impression you are rate shopping. For both reasons, they might deny your application. And that’s even worse for your credit score.
So, that’s where the cheap-all-the-time cards come in. This is what you want if you still have debt after a couple of 0 per cent transfers.
But as you target debt freedom this new year, make one of your goals to ditch your credit card debt once and for all… in as short a time and at the lowest cost possible.