July 15, 2025 • 18 mins
If you've got multiple debts, it might be tempting just to roll them all into one. But it's not a quick fix. You need to know the risks, how it works, and what it says about your attitude to money and debt. Join Canna Campbell - a financial planner for 20 years - and Fear & Greed's Michael Thompson as they look at debt consolidation as a strategy for getting on top of multiple debts.
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The information in this podcast is general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant Product Disclosure Statement or other offer document prior to acquiring any financial product.
Canna Campbell is an Authorised Representative and Financial Adviser of Links Licensee Services Pty Ltd AFSL No. 700012 ABN 97 678 975 589.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Welcome to How Do They Afford That, The podcast that
peaks into the financial lives of everyday Australians. I'm Michael Thompson.
I'm an author and the co host of the podcast
Fear and Greed business news As always, I'm with Canna Campbell,
financial planner, the founder of Sugar Mummer TV, the financial
literacy platform. Hello, Canna, good money. How are we? We
are we speaking on behalf of you, both of us.
(00:23):
Really we are excited because we are going to be
talking about debt today, which doesn't on its own sound
particularly exciting, does it. But when you are getting control
of your.
Speaker 2 (00:34):
Debt, well that's that sounds really cool. Sexy sexy You
whoa use the S word like normally? I'm in trouble
for using this.
Speaker 1 (00:43):
It's because you use it to describe superannuation, something that
is inherently unsexy.
Speaker 2 (00:48):
Well speak yourself.
Speaker 1 (00:49):
Indeed, so recently we were talking about using an interest
rate cut to help get on top of debt, and
I asked you a question just in passing about debt consolidation, right,
and you said, and you're the quote was, Michael, that's
an entire episode all on its own. So therefore, today
(01:12):
we are talking about debt consolidation.
Speaker 2 (01:15):
Fair enough, because there is a lot to say.
Speaker 1 (01:17):
There is, and obviously when we are talking today, it
is just all general information only. It is not financial advice.
And if you do hear something that relates to you,
then please speak to a licensed financial planner for information
that is specifically customized to your circumstances. Debt consolidation, Canna,
(01:38):
What exactly is it? How does it work? Give us
the one oh one on debt consolidation?
Speaker 2 (01:45):
All right. Debt consolidation is where you combine multiple smaller
debts into one central loan, and ideally the new loan
has a lower interest rate and better terms and conditions.
And it's about making like for your repayments list like
I guess, reducing that overall life admin and tiding up
you know, the financial mess that you perhaps previously created
(02:09):
or trying to get out of.
Speaker 1 (02:11):
Okay, so this is if you've got a whole bunch
of little things, or not even necessarily a whole bunch
of them, but just more than one, and you're combining
them into one. What kinds of debt are we talking
about here? Is it credit cards? Is it personal loans?
Is it car loans, kind of all these bits and
pieces things outside of your home loan, or can a
(02:31):
home loan be included? Can you combine it all into one?
I've asked you fourteen questions in one go. There I've
gotten very excited about.
Speaker 2 (02:37):
Look, you're on the right path initially, and you went
down a gutten path and I veered off the track.
So as you said, yes, obviously, credit cards, personal loans,
also buying our pay later. You know where people have
got multiple buying our paagers just got themselves into a
mess by abusing them. I've also seen people consolidate loans
taken for cosmetic surgery, loans taken for weddings loans and
(03:00):
for holidays. So I guess you could, I guess put
them into a general bucket of personal loans. And you know,
they get often get consolidated into a home loan debt
if you own a home, or they just get consolidated
into one large loan. But it's very rare for it
to ever see a home loan consolidated or an investment loan.
Speaker 1 (03:20):
Doesn't really make sense, Okay, No, So I think what
I meant by that if I can try, and it's salvage.
It would be that you end up combining those into
the home loan into is the keyword yppy, rather than
grouping that as one of those loans. Okay, the goal
here is it just to tidy things up and to
(03:42):
pay less interest because you've perhaps got some higher interest
rate loans in one.
Speaker 2 (03:48):
There is a tangible value like the obviously the interest
cost savings and you know, simplifying debt management. But then
there's also the intangible values of you know, getting back
in control again and creating that element of simplicity, and
you know, trying giving yourself I guess that financial respite
to a certain degree to try and undo all the
(04:09):
damage that you may have created by getting into the
debt in the first place. So it's kind of like
a little financial respite when used correctly. Okay, then there's
a big disclaimer there.
Speaker 1 (04:20):
Okay, I want to get to how it can be
used incorrectly as well. But how do you figure out
whether it's actually going to work? Because I mean, you
wouldn't do it unless it's actually going to offer you
some benefits in terms of saving you money ideally overall
on interest. How do you compare that? How do you
establish that.
Speaker 2 (04:39):
Okay, so you need to look at what is the
actual interest rate that you're being charged, you know, is
this consolidation going to be cheaper than what you're currently paying?
And also what are the loan terms, Like what's the
duration of the loan? Is it a five year loan,
a ten year loan, or like a home loan might
be a thirty year loan, which obviously softens the repayments,
you know that, And obviously the upset the downside is
(05:00):
the longer the term, the more the interest is going
to cost over the longness. You've got to look at
the details and do a proper comparison. They've also got
to look at, you know, the fees because sometimes when
it comes to debt consolidation, there might be administration fees
and there might also be sort of exit fees that
you're not aware of until you know last minute, you
could say. And then obviously you've got to compare absolutely everything.
(05:22):
But when it comes to debt consolidation, the last thing
you want to do is swap five short term headaches
for one massive long term migraine. And this is where
I think it can sometimes it can actually open up
Bandora's box.
Speaker 1 (05:40):
Okay, how do you actually do it? Though? You know
how in the past, you and I whenever we've talked
about topics. I understand the principles behind it. I understand
why you might do something. I understand perhaps what to
look out for so that you don't make mistakes. But
the thing that always gets me in the end is
the physical steps of how you act go through this process,
(06:02):
because I need it spelled out clearly for me.
Speaker 2 (06:05):
Is we need to consolidate some debt for you?
Speaker 1 (06:08):
No, you like the quick mental kind of check and
go No, no, no, no. I think I'm okay. But is
it a case of all right, say you've got a
credit card debt. Say you've got a personal loan for say,
let's say it was a holiday. Let's say you've got
two or three others, A buying our pay later one
(06:30):
and something else. Do you pick up your phone to
your bank? Do you pick up the phone to a
mortgage broker?
Speaker 2 (06:36):
All right? First of all, can we just say you
don't actually have to have multiple different types of debts
going on to think, okay, I need to get this consolidated.
There are times where people's just one simple credit card
is gotten out of control, and they need to look
at a debt consolidation. So don't think it's got to
be you know, rock bottom, three or four different types
of debt and you know growing. The quicker you get
(06:57):
onto this is actually the better, okay with it. Assuming
you have a home and a home loan, the first
place you would call is either your mortgage broker or
your bank, and it's about having a frank conversation and saying, look,
we had an unexpected expense, you know, such as a
medical expense whatever. The obviously, honesty is always the best policy.
(07:18):
Is a way that we can consolidate this debt so
that we can finally get back on top of our
cashlow because the interest is significantly higher on our credit
card than our home loan. The bank obviously will send
you an application form and go through that process with you,
or the mortgage broker will do all that work for
you and hopefully get your If there's nothing in your
offset account or your redraw facility, they can hopefully you
(07:38):
look at a change in the limit so that that
money can be paid out to, for example, the credit
card provider, and you know, you can go on your
merry way, but of course it means your home loan
goes up by that debt amount, your repayments obviously increase
as well, and obviously the cost the interest over the
time that loan to pay it off obviously increases as well.
(07:59):
If you don't have a home and you've got multiple debts,
you know, or one big debt, one big credit condy, yes,
you can look at applying for a personal loan and
try to find something that is ideally secured so you
get a lower interest rate than what you're currently paying
and get it all consolidated that way.
Speaker 1 (08:17):
Secured meaning that it is tied to another asset.
Speaker 2 (08:21):
Yes, so if it's unsecured, you'll pay a lot higher
interest rate, and there'll be greater terms and conditions as
to the duration of the loan and certain rules and
regulations as to how it's managed. Whereas, if you can
offer some sort of form of security that is a
valuable financial asset, where you know, if you default on
that loan, they can actually take claim of that particular
(08:43):
item or property, then obviously you'll be able to access
a lower interest rate. But if your own property, typically
you would go to your bank or your mortgage, your
lender and ask them to help you consolidate the debt.
Speaker 1 (08:53):
So why credit cards are so much higher, Usually because
they are an unsecured form of credit.
Speaker 2 (08:57):
Yeah, and there's stuff that we can't really show for.
We use them to buy stuff we can't really show
anything for.
Speaker 1 (09:03):
Yeah, you might pay for your groceries and that's gone, gone. Yes, Okay,
all right, I'm sorry. It's just slight little detail, but
I was interested. Okay, there's still We'll take a quick break.
When we come back. I want to ask you a
few more of the risks and the downsides and some
of the traps that are involved in debt consolidation, the
impact potentially on your credit score, your credit rating, and
(09:25):
also whether there are people for whom debt consolidation is
not a good idea. All right, So just a little
bit of thinking time or come back in a moment,
then to those ones, Cana, we are talking about debt
consolidation today. What are the risks here the downsides to
(09:50):
consolidating debts into one loan, or perhaps taking one form
of credit, one form of loan into another, one form
of debt rather into another. What are these downsides? And
you mentioned a couple of them in passing before, but
it is worth focusing on them specifically.
Speaker 2 (10:07):
Look, I don't think debt consolidation works for the majority
of people, Okay, and this is why I get a
bit frustrated and passionate about budgeting and responsible money management.
But at the end of the day, if you've gotten
into a situation where you need to consolidate debt, there
is obviously an issue at hand that has got to
be addressed and fixed. So you're not actually going to
(10:30):
the root of the cause, that is the spending habits,
or the lack of budgeting skills, or even I guess
an element of self destruction for some people in there.
So really what we're doing is when we go and
consolidate debt, it's like sweeping the actual problem under the mat.
And it looks great on paper, makes a lot of
sense financially when you look at the lower interest rate,
(10:51):
But I would say as much as nine times out
of ten, debt consolidation leads people in worse financial situations
than if they had it you had to go up
paying that debt off because what tends to happen. Yeah,
and this is why, and I've seen this active even
with some of my own friends. They get themselves into
credit card debt, and they've racked up a huge amount,
(11:13):
and then they suddenly one day paddic and go, oh,
I've got ten thousand dollars oring my credit card. And
so they jump online and they you know, find another
credit card company or another you know, some personal loan
provider that will consolidate them and get them back on track.
So immediately that card is cleared and they've got this
new ten thousand dollar loan over here, and their habit
(11:33):
system hasn't changed, they haven't gotten done a budget. They've
just basically moved that problem into the future, and they
continue on spending, and twelve months later they are back
into another ten thousand dollars worth a debt, but they
still had that other ten thousand dollars a loan that
they previously consolidated. So now you've got twenty thousand dollars
worth of debt. So if you don't have a budget
(11:55):
and some goals in place and have you know, some
an element of discipline, you could potentially, you know, this
could potentially backfire on you and you actually end up
paying way more over time. You're chasing your tail, and
you know, when you've got this type of debt in
your life. It's very hard to start saving and have
(12:16):
emergency money and start investing and putting money to superannuation
because you've still got this monkey on your back that
just doesn't seem to go away, and because you've never
gone to the actual root of the problem in the
first place.
Speaker 1 (12:27):
Okay, So clearly what I'm hearing then is debt consolidation
is not a magic bullet kind of thing. You can't
just assume that it's going to fix the whole thing.
What it is, it's a tool in the right circumstances,
but it has to be coupled with a change in mindset.
Speaker 2 (12:45):
And also from a practical point of view, you know,
you need to be looking at a repayment plan that
actually gets you back to where you were before you
took that debt out. So say, for example, I get
into ten thousand dollars with a credit card debt, and
I have a two hundred thousand dollars home loan. I
go to my back I can get them to increase
my home loan to two hundred and ten. Clear that
credit card debt. I need to take full accountability for
(13:07):
the irresponsible spending up done or perhaps something maybe you
have just happened in life, as it does to all
of us. You know, maybe I had a medical expense,
so no one, Yeah.
Speaker 1 (13:16):
I mean medical. It's not necessarily to blame blaming.
Speaker 2 (13:19):
But you also, you know, you've got to you know,
that's why we have emergency money, you know. So you've
got to also be reasonably responsible here, you know. And
then so you should never you never want to be
in a position where you have to consolidate. That that's
a red flag, that something you need to get advice,
I'd say.
Speaker 1 (13:37):
Okay, so you would view then debt consolidation as a
last resource, yes, okay.
Speaker 2 (13:42):
All right, but yes, and that's a good question. Yes,
but it must be taken very very seriously. If you're
it's a red flag if you're needing debt consolidation, and
you must do the extra work. It's not about just
going great, tick a box. Okay, my mortgage repayment I
have only increased by twenty dollars per week for this
ten thousand dollar increase. It's not as simple as that.
(14:06):
If you're serious about your functional being, you actually need
to try and make good again that ten thousand dollar
increase and add extra money to your home loan by
looking at your budget and going, Okay, I need to
catch up again because I've taken a step backwards. So
I'm going to increase my mortgage repayments by one hundred
dollars per week, and I'm going to do some side
hustles and put my tax refund and I'm going to
(14:27):
actually make sure that I'm back to where I was in
six months time or twelve months time or eighteen months time.
So it's not about pushing the problem into the future.
Speaker 1 (14:33):
Okay, you mentioned earlier incorrect usage of it, and that's
really kind of what you outlined before then of using
it to clear that ten thousand dollar credit card debt
and then you move on to the next debt and
you just start building it up again. You talked about
kind of the potential for fees long term loans and
just pushing this problem out into the future, exit fees
(14:56):
and things, all of little bits and pieces that can
make this an even more expensive option. One thing I
wanted to ask you about was the impact on your
credit rating, your credit score. What can it do to
that and is there a long term impact on your
ability to then perhaps get a home loan in the future.
Speaker 2 (15:15):
Before I answer that Questian like, just there's one thing
you sort of missed then a second ago in talking
about like you know obviously the traps to watch out for,
and that is actually being lulled back into taking more debt. Okay, No,
I had a classic situation with a friend who got
herself into a huge amount of debt just lifestyle, and
you know, before she knew it, she was being sent
(15:38):
all these pre approvals to increase her credit card limits
over and over and over above, even though she was
drowning in debt and still hadn't actually really gotten a
head above water. So that is obviously another risk of
these things, and obviously the risk that the interest rate
may change, particularly with you know, the personal lone providers,
they might have a honeymoon rate. This sounds great, but
it also can expire. So just wanted to put that
(15:58):
out there. And so coming back to your question about
credit score.
Speaker 1 (16:02):
My very long winded question it was I had.
Speaker 2 (16:04):
To go I had through under the bus by having
to go back a second and correct your answer. But yes,
it does impact your credit score because you're applying for
a new loan, so that creates a credit inquiry, and
obviously the consolidation is going to impact your serviceability, and
this is particularly important if you plan on borrowing money
again in the future, and if you have missed repayments
(16:28):
from those previous debts you've had and you're looking to
apply for a new loan, it could potentially drag down
your credit score. But on the same time, it's done
right and it's managed well, it obviously can actually improve
your credit score over time. And I did have a
situation with someone where I was trying to help them.
They got into a huge amount of toxic debt. And
then when I went with them and took into a
(16:50):
mortgage broker to help them, and it was the only
option for them was to was to look at debt consolidation. Unfortunately,
when we went to try and do that, their loan
was not back because they had such a damaged credit
score from all these short term issues with their spending
and defaulting and missing payments and being hit with late
(17:12):
fees and so forth.
Speaker 1 (17:14):
So the damage had already been done.
Speaker 2 (17:15):
Yeah, So why I said at the beginning, you want
to get onto this sooner other than later. The moment
you have one credit card that's got you into trouble.
There's your sign to go get some advice and speak
to a mortgage broker, speech to your bank before that
credit card debt gets any bigger.
Speaker 1 (17:31):
This went in a different direction to what I was expecting.
I honestly was thinking and maybe this is what other
people think too, that the debt consolidation was quite a functional,
quite a useful kind of approach to getting multiple debts
under control. But really there is a lot you need
to be careful of. This is not a quick fix.
Speaker 2 (17:50):
No, it's clever marketing. You know, they make it sound
like a magical wand but it's far from that. And again,
this is why people need to be aware of this,
because they don't realize it often until it's too late.
Speaker 1 (18:03):
And really that it does require discipline to come with it.
That if the debt consolidation without a change in your
mindset and a change in your approach to your money
is just going to lead to more problems.
Speaker 2 (18:16):
Exactly.
Speaker 1 (18:17):
Okay, all right? If people want more information from you,
where do they find you? Kada?
Speaker 2 (18:23):
The best place to get in contact with me is
on Instagram at Sugar Mama TV.
Speaker 1 (18:27):
Perfect and you can hear me every day with Sean
Aylmer on fear and great daily business news for people
who make their own decisions. Thank you very much for
listening to how do they afford that? Remember please hit
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Thank you for your company. Join us again next week.
Welcome to How Do They Afford That, The podcast that
peaks into the financial lives of everyday Australians. I'm Michael Thompson.
I'm an author and the co host of the podcast
Fear and Greed business news As always, I'm with Canna Campbell,
financial planner, the founder of Sugar Mummer TV, the financial
literacy platform. Hello, Canna, good money. How are we? We
are we speaking on behalf of you, both of us.
(00:23):
Really we are excited because we are going to be
talking about debt today, which doesn't on its own sound
particularly exciting, does it. But when you are getting control
of your.
Speaker 2 (00:34):
Debt, well that's that sounds really cool. Sexy sexy You
whoa use the S word like normally? I'm in trouble
for using this.
Speaker 1 (00:43):
It's because you use it to describe superannuation, something that
is inherently unsexy.
Speaker 2 (00:48):
Well speak yourself.
Speaker 1 (00:49):
Indeed, so recently we were talking about using an interest
rate cut to help get on top of debt, and
I asked you a question just in passing about debt consolidation, right,
and you said, and you're the quote was, Michael, that's
an entire episode all on its own. So therefore, today
(01:12):
we are talking about debt consolidation.
Speaker 2 (01:15):
Fair enough, because there is a lot to say.
Speaker 1 (01:17):
There is, and obviously when we are talking today, it
is just all general information only. It is not financial advice.
And if you do hear something that relates to you,
then please speak to a licensed financial planner for information
that is specifically customized to your circumstances. Debt consolidation, Canna,
(01:38):
What exactly is it? How does it work? Give us
the one oh one on debt consolidation?
Speaker 2 (01:45):
All right. Debt consolidation is where you combine multiple smaller
debts into one central loan, and ideally the new loan
has a lower interest rate and better terms and conditions.
And it's about making like for your repayments list like
I guess, reducing that overall life admin and tiding up
you know, the financial mess that you perhaps previously created
(02:09):
or trying to get out of.
Speaker 1 (02:11):
Okay, so this is if you've got a whole bunch
of little things, or not even necessarily a whole bunch
of them, but just more than one, and you're combining
them into one. What kinds of debt are we talking
about here? Is it credit cards? Is it personal loans?
Is it car loans, kind of all these bits and
pieces things outside of your home loan, or can a
(02:31):
home loan be included? Can you combine it all into one?
I've asked you fourteen questions in one go. There I've
gotten very excited about.
Speaker 2 (02:37):
Look, you're on the right path initially, and you went
down a gutten path and I veered off the track.
So as you said, yes, obviously, credit cards, personal loans,
also buying our pay later. You know where people have
got multiple buying our paagers just got themselves into a
mess by abusing them. I've also seen people consolidate loans
taken for cosmetic surgery, loans taken for weddings loans and
(03:00):
for holidays. So I guess you could, I guess put
them into a general bucket of personal loans. And you know,
they get often get consolidated into a home loan debt
if you own a home, or they just get consolidated
into one large loan. But it's very rare for it
to ever see a home loan consolidated or an investment loan.
Speaker 1 (03:20):
Doesn't really make sense, Okay, No, So I think what
I meant by that if I can try, and it's salvage.
It would be that you end up combining those into
the home loan into is the keyword yppy, rather than
grouping that as one of those loans. Okay, the goal
here is it just to tidy things up and to
(03:42):
pay less interest because you've perhaps got some higher interest
rate loans in one.
Speaker 2 (03:48):
There is a tangible value like the obviously the interest
cost savings and you know, simplifying debt management. But then
there's also the intangible values of you know, getting back
in control again and creating that element of simplicity, and
you know, trying giving yourself I guess that financial respite
to a certain degree to try and undo all the
(04:09):
damage that you may have created by getting into the
debt in the first place. So it's kind of like
a little financial respite when used correctly. Okay, then there's
a big disclaimer there.
Speaker 1 (04:20):
Okay, I want to get to how it can be
used incorrectly as well. But how do you figure out
whether it's actually going to work? Because I mean, you
wouldn't do it unless it's actually going to offer you
some benefits in terms of saving you money ideally overall
on interest. How do you compare that? How do you
establish that.
Speaker 2 (04:39):
Okay, so you need to look at what is the
actual interest rate that you're being charged, you know, is
this consolidation going to be cheaper than what you're currently paying?
And also what are the loan terms, Like what's the
duration of the loan? Is it a five year loan,
a ten year loan, or like a home loan might
be a thirty year loan, which obviously softens the repayments,
you know that, And obviously the upset the downside is
(05:00):
the longer the term, the more the interest is going
to cost over the longness. You've got to look at
the details and do a proper comparison. They've also got
to look at, you know, the fees because sometimes when
it comes to debt consolidation, there might be administration fees
and there might also be sort of exit fees that
you're not aware of until you know last minute, you
could say. And then obviously you've got to compare absolutely everything.
(05:22):
But when it comes to debt consolidation, the last thing
you want to do is swap five short term headaches
for one massive long term migraine. And this is where
I think it can sometimes it can actually open up
Bandora's box.
Speaker 1 (05:40):
Okay, how do you actually do it? Though? You know
how in the past, you and I whenever we've talked
about topics. I understand the principles behind it. I understand
why you might do something. I understand perhaps what to
look out for so that you don't make mistakes. But
the thing that always gets me in the end is
the physical steps of how you act go through this process,
(06:02):
because I need it spelled out clearly for me.
Speaker 2 (06:05):
Is we need to consolidate some debt for you?
Speaker 1 (06:08):
No, you like the quick mental kind of check and
go No, no, no, no. I think I'm okay. But is
it a case of all right, say you've got a
credit card debt. Say you've got a personal loan for say,
let's say it was a holiday. Let's say you've got
two or three others, A buying our pay later one
(06:30):
and something else. Do you pick up your phone to
your bank? Do you pick up the phone to a
mortgage broker?
Speaker 2 (06:36):
All right? First of all, can we just say you
don't actually have to have multiple different types of debts
going on to think, okay, I need to get this consolidated.
There are times where people's just one simple credit card
is gotten out of control, and they need to look
at a debt consolidation. So don't think it's got to
be you know, rock bottom, three or four different types
of debt and you know growing. The quicker you get
(06:57):
onto this is actually the better, okay with it. Assuming
you have a home and a home loan, the first
place you would call is either your mortgage broker or
your bank, and it's about having a frank conversation and saying, look,
we had an unexpected expense, you know, such as a
medical expense whatever. The obviously, honesty is always the best policy.
(07:18):
Is a way that we can consolidate this debt so
that we can finally get back on top of our
cashlow because the interest is significantly higher on our credit
card than our home loan. The bank obviously will send
you an application form and go through that process with you,
or the mortgage broker will do all that work for
you and hopefully get your If there's nothing in your
offset account or your redraw facility, they can hopefully you
(07:38):
look at a change in the limit so that that
money can be paid out to, for example, the credit
card provider, and you know, you can go on your
merry way, but of course it means your home loan
goes up by that debt amount, your repayments obviously increase
as well, and obviously the cost the interest over the
time that loan to pay it off obviously increases as well.
(07:59):
If you don't have a home and you've got multiple debts,
you know, or one big debt, one big credit condy, yes,
you can look at applying for a personal loan and
try to find something that is ideally secured so you
get a lower interest rate than what you're currently paying
and get it all consolidated that way.
Speaker 1 (08:17):
Secured meaning that it is tied to another asset.
Speaker 2 (08:21):
Yes, so if it's unsecured, you'll pay a lot higher
interest rate, and there'll be greater terms and conditions as
to the duration of the loan and certain rules and
regulations as to how it's managed. Whereas, if you can
offer some sort of form of security that is a
valuable financial asset, where you know, if you default on
that loan, they can actually take claim of that particular
(08:43):
item or property, then obviously you'll be able to access
a lower interest rate. But if your own property, typically
you would go to your bank or your mortgage, your
lender and ask them to help you consolidate the debt.
Speaker 1 (08:53):
So why credit cards are so much higher, Usually because
they are an unsecured form of credit.
Speaker 2 (08:57):
Yeah, and there's stuff that we can't really show for.
We use them to buy stuff we can't really show
anything for.
Speaker 1 (09:03):
Yeah, you might pay for your groceries and that's gone, gone. Yes, Okay,
all right, I'm sorry. It's just slight little detail, but
I was interested. Okay, there's still We'll take a quick break.
When we come back. I want to ask you a
few more of the risks and the downsides and some
of the traps that are involved in debt consolidation, the
impact potentially on your credit score, your credit rating, and
(09:25):
also whether there are people for whom debt consolidation is
not a good idea. All right, So just a little
bit of thinking time or come back in a moment,
then to those ones, Cana, we are talking about debt
consolidation today. What are the risks here the downsides to
(09:50):
consolidating debts into one loan, or perhaps taking one form
of credit, one form of loan into another, one form
of debt rather into another. What are these downsides? And
you mentioned a couple of them in passing before, but
it is worth focusing on them specifically.
Speaker 2 (10:07):
Look, I don't think debt consolidation works for the majority
of people, Okay, and this is why I get a
bit frustrated and passionate about budgeting and responsible money management.
But at the end of the day, if you've gotten
into a situation where you need to consolidate debt, there
is obviously an issue at hand that has got to
be addressed and fixed. So you're not actually going to
(10:30):
the root of the cause, that is the spending habits,
or the lack of budgeting skills, or even I guess
an element of self destruction for some people in there.
So really what we're doing is when we go and
consolidate debt, it's like sweeping the actual problem under the mat.
And it looks great on paper, makes a lot of
sense financially when you look at the lower interest rate,
(10:51):
But I would say as much as nine times out
of ten, debt consolidation leads people in worse financial situations
than if they had it you had to go up
paying that debt off because what tends to happen. Yeah,
and this is why, and I've seen this active even
with some of my own friends. They get themselves into
credit card debt, and they've racked up a huge amount,
(11:13):
and then they suddenly one day paddic and go, oh,
I've got ten thousand dollars oring my credit card. And
so they jump online and they you know, find another
credit card company or another you know, some personal loan
provider that will consolidate them and get them back on track.
So immediately that card is cleared and they've got this
new ten thousand dollar loan over here, and their habit
(11:33):
system hasn't changed, they haven't gotten done a budget. They've
just basically moved that problem into the future, and they
continue on spending, and twelve months later they are back
into another ten thousand dollars worth a debt, but they
still had that other ten thousand dollars a loan that
they previously consolidated. So now you've got twenty thousand dollars
worth of debt. So if you don't have a budget
(11:55):
and some goals in place and have you know, some
an element of discipline, you could potentially, you know, this
could potentially backfire on you and you actually end up
paying way more over time. You're chasing your tail, and
you know, when you've got this type of debt in
your life. It's very hard to start saving and have
(12:16):
emergency money and start investing and putting money to superannuation
because you've still got this monkey on your back that
just doesn't seem to go away, and because you've never
gone to the actual root of the problem in the
first place.
Speaker 1 (12:27):
Okay, So clearly what I'm hearing then is debt consolidation
is not a magic bullet kind of thing. You can't
just assume that it's going to fix the whole thing.
What it is, it's a tool in the right circumstances,
but it has to be coupled with a change in mindset.
Speaker 2 (12:45):
And also from a practical point of view, you know,
you need to be looking at a repayment plan that
actually gets you back to where you were before you
took that debt out. So say, for example, I get
into ten thousand dollars with a credit card debt, and
I have a two hundred thousand dollars home loan. I
go to my back I can get them to increase
my home loan to two hundred and ten. Clear that
credit card debt. I need to take full accountability for
(13:07):
the irresponsible spending up done or perhaps something maybe you
have just happened in life, as it does to all
of us. You know, maybe I had a medical expense,
so no one, Yeah.
Speaker 1 (13:16):
I mean medical. It's not necessarily to blame blaming.
Speaker 2 (13:19):
But you also, you know, you've got to you know,
that's why we have emergency money, you know. So you've
got to also be reasonably responsible here, you know. And
then so you should never you never want to be
in a position where you have to consolidate. That that's
a red flag, that something you need to get advice,
I'd say.
Speaker 1 (13:37):
Okay, so you would view then debt consolidation as a
last resource, yes, okay.
Speaker 2 (13:42):
All right, but yes, and that's a good question. Yes,
but it must be taken very very seriously. If you're
it's a red flag if you're needing debt consolidation, and
you must do the extra work. It's not about just
going great, tick a box. Okay, my mortgage repayment I
have only increased by twenty dollars per week for this
ten thousand dollar increase. It's not as simple as that.
(14:06):
If you're serious about your functional being, you actually need
to try and make good again that ten thousand dollar
increase and add extra money to your home loan by
looking at your budget and going, Okay, I need to
catch up again because I've taken a step backwards. So
I'm going to increase my mortgage repayments by one hundred
dollars per week, and I'm going to do some side
hustles and put my tax refund and I'm going to
(14:27):
actually make sure that I'm back to where I was in
six months time or twelve months time or eighteen months time.
So it's not about pushing the problem into the future.
Speaker 1 (14:33):
Okay, you mentioned earlier incorrect usage of it, and that's
really kind of what you outlined before then of using
it to clear that ten thousand dollar credit card debt
and then you move on to the next debt and
you just start building it up again. You talked about
kind of the potential for fees long term loans and
just pushing this problem out into the future, exit fees
(14:56):
and things, all of little bits and pieces that can
make this an even more expensive option. One thing I
wanted to ask you about was the impact on your
credit rating, your credit score. What can it do to
that and is there a long term impact on your
ability to then perhaps get a home loan in the future.
Speaker 2 (15:15):
Before I answer that Questian like, just there's one thing
you sort of missed then a second ago in talking
about like you know obviously the traps to watch out for,
and that is actually being lulled back into taking more debt. Okay, No,
I had a classic situation with a friend who got
herself into a huge amount of debt just lifestyle, and
you know, before she knew it, she was being sent
(15:38):
all these pre approvals to increase her credit card limits
over and over and over above, even though she was
drowning in debt and still hadn't actually really gotten a
head above water. So that is obviously another risk of
these things, and obviously the risk that the interest rate
may change, particularly with you know, the personal lone providers,
they might have a honeymoon rate. This sounds great, but
it also can expire. So just wanted to put that
(15:58):
out there. And so coming back to your question about
credit score.
Speaker 1 (16:02):
My very long winded question it was I had.
Speaker 2 (16:04):
To go I had through under the bus by having
to go back a second and correct your answer. But yes,
it does impact your credit score because you're applying for
a new loan, so that creates a credit inquiry, and
obviously the consolidation is going to impact your serviceability, and
this is particularly important if you plan on borrowing money
again in the future, and if you have missed repayments
(16:28):
from those previous debts you've had and you're looking to
apply for a new loan, it could potentially drag down
your credit score. But on the same time, it's done
right and it's managed well, it obviously can actually improve
your credit score over time. And I did have a
situation with someone where I was trying to help them.
They got into a huge amount of toxic debt. And
then when I went with them and took into a
(16:50):
mortgage broker to help them, and it was the only
option for them was to was to look at debt consolidation. Unfortunately,
when we went to try and do that, their loan
was not back because they had such a damaged credit
score from all these short term issues with their spending
and defaulting and missing payments and being hit with late
(17:12):
fees and so forth.
Speaker 1 (17:14):
So the damage had already been done.
Speaker 2 (17:15):
Yeah, So why I said at the beginning, you want
to get onto this sooner other than later. The moment
you have one credit card that's got you into trouble.
There's your sign to go get some advice and speak
to a mortgage broker, speech to your bank before that
credit card debt gets any bigger.
Speaker 1 (17:31):
This went in a different direction to what I was expecting.
I honestly was thinking and maybe this is what other
people think too, that the debt consolidation was quite a functional,
quite a useful kind of approach to getting multiple debts
under control. But really there is a lot you need
to be careful of. This is not a quick fix.
Speaker 2 (17:50):
No, it's clever marketing. You know, they make it sound
like a magical wand but it's far from that. And again,
this is why people need to be aware of this,
because they don't realize it often until it's too late.
Speaker 1 (18:03):
And really that it does require discipline to come with it.
That if the debt consolidation without a change in your
mindset and a change in your approach to your money
is just going to lead to more problems.
Speaker 2 (18:16):
Exactly.
Speaker 1 (18:17):
Okay, all right? If people want more information from you,
where do they find you? Kada?
Speaker 2 (18:23):
The best place to get in contact with me is
on Instagram at Sugar Mama TV.
Speaker 1 (18:27):
Perfect and you can hear me every day with Sean
Aylmer on fear and great daily business news for people
who make their own decisions. Thank you very much for
listening to how do they afford that? Remember please hit
follow on the podcast, and the best thing you can
do is tell somebody else to spread the word about
the podcast by sending them a link to this very episode.
Thank you for your company. Join us again next week.
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