Author Katrina Shanks, CEO Financial Advice NZ. Article originally published in stuff.co.nz.

OPINION: Sorted Money Month’s theme of helping Kiwis maximise their money is coming at the right time – when many people are doing it tough money-wise.

Te Ara Ahunga Ora Retirement Commission’s Money Month is designed to help demystify money for Kiwis, and I kicked it off last week by talking about budgeting, saving to survive, paying off your mortgage faster, and investing, as ways to maximise your money, depending on how much you have to spare.

But the real concern is around those who have little or no money to spare, and live pay to pay.

It’s they who are being hit hardest by the rapid increases in the cost of groceries, fuel, mortgages, and rents

They are either the 43 per cent of people who say they aren’t saving because they live pay day to pay day, the 28 per cent who say they aren’t living within their means, or the 25 per cent who can’t save even one cent a week*. Or a combination of those.

Living pay day to pay day is a particular threat because it can force people into bad financial habits.

Such as using credit to pay for everyday bills.

That’s a bad habit because if not done carefully, credit can quickly turn into an ever-growing snowball of debt gathering size and pace as it rumbles down the hill.

Many people get credit through a credit card and, according to the Reserve Bank, that’s growing.

Their research shows billings on personal cards were $3.9 billion in June, up 2.4 percentage points in a month.

As well, in May, personal interest-bearing advances outstanding were up 2% on a year earlier, to $2.96b. That’s personal debt that has to be paid back at some stage.

That debt was owed by more than half (52.6 per cent) of personal credit card holders, a figure that was also higher than April.

When you consider the average interest rate on those advances was 18.9 percent, you can see the extent of the problem – because missing a payment or failing to keep them going at that rate means things can spiral as those rates keep compounding.

In addition, credit bureau Centrix reports there were 414,000 people behind on credit payments in June, 5 per cent higher than the same time last year and above pre-pandemic levels, though down slightly from May. Mortgage arrears were up 34% year-on-year.

And, while arrears have been rising across all age groups, consumers under the age of 25 are among those hit hardest by the soaring cost of living and are more likely to experience issues with their cash flow, Centrix reports.

If you have no option but to use a credit card there are ways you can keep things under control.

First, if you can pay off each transaction within a certain period (commonly 55 days) you will pay no interest.

That’s by far the best thing to do.

You get an allotted time to use the bank’s money for free, and that can only be good.

But if you’re not able to do that, the very, very least you must do is make the minimum due payment each month.

But be aware this is not ideal. It will not pay off the card and you will still be charged interest on the remaining debt and so it will continue to grow over time.

You should use it as a short-term measure only.

Much better is to pay more than the minimum amount, because every bit above that means that’s less debt that’s attracting interest.

The more you pay, the less debt you will have, the less interest you will pay, and the faster you will get rid of the debt.

Speed is the key.

But if you find you just can’t meet even the basic, regular payments, what should you do?

The first thing is to contact your credit card provider and explain your situation.

If you think your situation will improve in the next few months, you could ask them to freeze interest and other charges, pause your repayments, or agree on a repayment plan, and you might be surprised how accommodating they will be.

After all, they want you to pay them back, so it’s in their interests to help you achieve this.

In the meantime, don’t add to your debt by making new purchases or getting another card from another bank!

Another good idea is to look around for other providers who may be offering reduced terms.

From time to time, some even offer no interest terms for the first 12 months if you switch your debt to them. Your debt doesn’t go away, but at least you can get some relief till your situation improves.

Apart from paying off your transactions within the no-interest period, the next best thing is to think hard about how you can live within your means.

You can do that by re-examining your total spending and budget to cut down your outgoings.

There are many ways to do that:

  • use the 50-30-20 budget rule (spend 50% on necessities, 30% on nice-to-haves, 20% on savings)
  • never spend more than you have
  • sleep on big purchases
  • be careful around sales (use a 24-hour cooling-off period)
  • plan your meals, shop online, stick to your list
  • shop around.

My column from last week has more ideas on this, but the main thing with budgets is to have a plan and stick to it.

You could also consider debt consolidation, where you combine your debts into one with a lower interest rate.

Lastly, if all else fails, seek professional advice.

There’s no shame in reaching out for help, and often an outsider can see solutions that you or your family can’t.

Yes, I have a credit card and occasionally put more purchases on it than I should, which are normally nice-to-haves.

I have both emergency funds and savings which I can use to pay back the credit card but always regret the spend when I have to do this and then rebuild these balances again.

Good financial behaviours need to be continually applied to your life – but we are all human!

 As my financial adviser would say – if you can, avoid paying for things on credit that you don’t have to or don’t need.

*Canstar NZ Consumer Pulse Report 2023

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