COMMENT: Debt is as Kiwi as Buzzy Bees and baches. Some debt can be good of course. It enables people to achieve goals. You might borrow to buy a home or run a business.
Student debt spent on education and essentials (not booze and Starbucks), and debt on a car which keeps you mobile can also help you get ahead financially.
Almost everyone has a heavy dose of consumer debt, built up for all the wrong reasons.
The one that really gets me hot under the collar, though, is the "carrying a balance" myth, by which I mean never paying off your credit card debt and rolling it over to next month. The creative use of language in describing it as "carrying a balance" whitewashes the fact that a balance is debt that should be got rid of. The credit limit is not your own money.
And there are other myths which get Kiwis into debt and keep them there, such as:
• A credit card or other debt will help you get a good credit score. Simply having utilities accounts and paying them on time will help you build a credit score. Thanks to comprehensive credit reporting, good financial behaviour such as paying utilities bills on time is just as effective, says Lyn McMorran, executive director of the Financial Services Federation. Comprehensive reporting is relatively new in New Zealand and scores you on your payment behaviour, not just negatively when you default.
• My partner's debt belongs to him or her. This is a really tricky one says Susan Taylor, chief executive officer of Financial Services Complaints Limited, a complaints resolution service that deals with many lenders. Taylor sees too many cases where couples believe they're only liable for half the debt. The contracts they sign with banks and lenders, however, make them "jointly and severally liable", which means both are responsible and the lender can chase just one if it chooses. This can happen long after the couple has split.
• It's only necessary to make minimum payments. When lenders sell debt they focus on minimum payments because the number looks small. However, minimum payments rarely pay off the loan on time.
• Interest free, is free. The problem with "interest free" loans sold by retail stores and others is that there are still establishment and other fees tacked on. Sometimes expensive insurance may be loaded in and the lenders rely on borrowers failing to pay the loan off on time to earn more. What's more, the lowest prices at retail stores may be offered in the weeks when they don't have juicy "interest free" deals. That means the total cost of the purchase could be more than it would be in another week. Nothing in life is free.
• There's no reason to pay off a student loan. Student loan debt is interest free in New Zealand. If you go overseas for more than six months, however, you'll be charged interest on the debt. The current rate is 4.3 per cent, which on a big student debt starts to spiral out of control fast. New Zealand-based Kiwis earning more than $19,448 have 12 per cent of every dollar earned over that figure deducted automatically in repayments by the Inland Revenue Department. Student loans may be interest free, but they can also hold you back financially. If, for example, you want to borrow to buy a house, your student loan debt will reduce the amount you can borrow accordingly.
• Debt consolidation costs less. Some lenders sell debt consolidation hard. That's because they do very well out of the fees and also the fact that by paying interest over a longer period you actually pay more overall, even if the regular repayments are less.
• Car and credit card payments are a way of life. Ask around your friends, family and workmates and you'll find some who don't have credit cards and those who buy their cars with saved money rather than borrow against future earnings.
• A mortgage is always good debt. The value of the home usually rises faster than the interest rate paid, which means that a mortgage helps you grow your money not erode it. That is true unless you're whacking your other debt onto the mortgage. For example, financing a car over 25 or 30 years on a home loan is not smart. "The debt lasts far longer than the asset," says McMorran.
• Eventually you'll get out of debt. You won't if you don't take steps to change your ways and pay it off.
Buying into debt myths will stop you getting ahead financially. Too many Kiwis find themselves in the position of not being able to fulfil dreams because of the consumer debt hanging over them. Don't let that be you.