Each week, the NZ Herald and Newstalk ZB's Cooking The Books podcast tackles a different money problem. Today, it's different types of debt, and what to do about the bad kind. Hosted by Frances Cook.

We're a nation with a debt problem.

Many New Zealand borrowers have debt that's up to 12 times the amount they earn in a year.

You can argue that a certain amount of debt is a good thing. But banking bosses warn that ideally we shouldn't have debt of more than seven times what we earn in a year.

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So, we're way over.

It's so bad that just this month, Australia's Reserve Bank cast a worried eye over New Zealand debt levels.

They declared our debt-to-income levels were so bad, it was not only a risk to the New Zealand economy, but Australia's as well.

Hush, Australia. Nobody likes the bearer of bad news.

To be clear, I personally don't like any debt. But not all of it is dumb.

For instance, good luck paying cash for a university education. And hey, at least your student loan is interest free.

Getting a mortgage so you can invest in your own home is necessary for almost everyone.

But there are reasons to be cautious, as you still don't want a mortgage that's bigger than you can pay off. It's worth mentioning that the current crazy house prices are contributing to our nation's debt problem.

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So what exactly is the difference between a mortgage, and setting up a loan to buy a car? Is there ever a good reason to get into debt?

To answer the question for the latest Cooking the Books podcast, I turned to EnableMe founder and financial personal trainer Hannah McQueen.

She said there was good, neutral, and bad debt.

Good debt happened when certain conditions were met; you were buying something that would increase in value, and that increase would be more than the interest you paid on the debt.

Neutral debt was for something like your home, where it made sense to have the house, but you wouldn't make a profit.

Bad debt was things like credit cards or car loans, particularly if you weren't paying them off.

While some people might be surprised a mortgage on your own home was a neutral debt, McQueen said there were good reasons to classify it that way.

"The mortgage on your home is a neutral debt, the mortgage on an investment property is good debt.

"The mortgage on your home costs you interest, and any capital gain on that property is the win.

"Except if you intend to live in a property for the rest of your life, you're not really realising that win."

If you borrowed more than you could comfortably afford for a house, that also left you vulnerable to interest rate changes. If you stretched yourself too far, it could turn into bad debt.

But while it's all very well to know what types of debt to avoid, what about those who've already got themselves stuck in bad debt?

McQueen recommends sitting down, being brutally honest about where you're at, and then making a plan about how to pay everything off.

"Credit cards, at the very least, they should be consolidated on to a low interest credit card.

"That normally means you transfer the balance to another bank, and you have six to 12 months to pay it off at a reduced interest rate.

"That will at least stop you haemorrhaging interest, because the interest rate on credit cards, it should be illegal."

Even if you take those sorts of steps, don't forget that first key step of being brutally honest with yourself.

A lot of bad debt can be accumulated by people spending more than they earn, even if they're earning a comfortable amount.

"That can be confronting for some people. It might mean they need to curb spending, or they might just need to do a few tweaks, or they might just need a goal and someone to help them achieve the goal.

"What we find in our day-to-day job, is that in the absence of a goal, people just spend whatever's there.

"So we need to address the issue of why you've got the credit card debt, so that you don't, I guess, reoffend."

Student loans, at least in New Zealand, are good debt. They're interest free, and you're treating yourself as an asset which will hopefully earn more money after the studying.

I told her that I don't pay any more than the minimum on my student loan.

Particularly with it being interest free, I've decided the effect of inflation means the debt effectively gets smaller over time, even without me making the minimum payments.

Happily, she gave me the tick of approval, that it was technically the perfect way to handle it.

That didn't mean I was totally off the hook, though.

"But if you're not channelling the money into paying off that debt, then where is it going?

"Unless it's going towards a strategy, than what happens is most people spend it.

"If you're just going to spend it or fritter it, then you would've been better off reducing that debt."

For the full interview, listen to the podcast.

If you have questions, or something you'd like covered in a future podcast, get in touch.
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