Dealing with debt: an interview with Christopher Zinn from Choice

I don’t know about you, but that report from Choice got me thinking - how did we get up to our eyeballs in debt? What can we do to turn things around? What can we do if we’re already in trouble? So when I had a chance to get some answers, I jumped on it and here is the result - my interview with Christopher Zinn, the spokesperson for Choice.

It is common to see credit cards as debt culprit, but are there other debts people should - and can - avoid?

Store finance deals have many traps that we’ve warned about for many years. These credit deals are lucrative for finance companies and can be profitable for retailers too, but for consumers they’re a real mixed bag. Some provide good value if used cleverly; others should probably come with a wealth warning.

For example, not all credit deals are interest-free — some charge interest straightaway. Rates are likely to be higher than competitive personal loans and credit cards. Some deals, give a no-interest period (such as one year) before charging interest for the rest of the term. But with a high interest rate charged for the remainder (for example, three years), it’s not an option we’d recommend — unless you repay in full within the interest-free period.

Do you think that the chart of “Household debt Vs income” in the report represents a change in mindset of Australians regarding debt and debt management? Or do we spend more because of the marketing strategy of credit card companies that gets better and better over the years, combined with loose lending regulations?

The main reason for the increase in debt are housing costs and high mortgages. Australians have recently adapted to the tough times ahead and are reducing their reliance on debt by repaying credit cards and other debt. But credit card debt still stands at record levels.

Are certain demographics more likely to have trouble managing debts and if so, why? In other words, is there a certain age group that is in greater danger of getting into debt?

According to government statistics the majority of bankrupts is aged over 40, 19% are aged between 25 and 209 and 27% are aged between 30 and 39 years. 16% only owe less than $10,000 with about half of all bankrupts owing between $10000 and $49,000.

The report says: “Many people spiral into debt through circumstances beyond their control, such as losing their job, family breakdown or illness”. How do you know when to ask for help? What are the signs? How do you catch it before it’s too late?

Trouble of meeting your repayments or paying your bills would be a sure sign that you have a problem. The worst thing you can do is paying off one credit card with another one as it gets you in deeper. A good place to go are also financial counselors they can give you information about your options, help you with budgeting and making a hardship application.

The report suggests that people should consider selling a second car to reduce the debt. At the same time, it says that if a person is unable to make repayments on a mortgage they should apply for early release of super. Why not suggest that they sell the house to cover the debts and rent a place to live until their financial situation improves?

We are not suggesting that people should apply for early release of super – this option is a dangerous last resort. For most people, early super withdrawal is a trap, and one that’s been used by unscrupulous and predatory lenders. What we are suggesting is to go to a financial counselor and to find out your options.

If you are unable to make repayments the first thing is to contact your lender and let them know about your situation. The Uniform Consumer Credit Code allows you to make an application for a hardship variation of your loan in case of temporary financial difficulties. Apply for temporary relief such as reducing your minimum repayments or a waiver of fees or even interest.

In the GFC (global financial crisis), do you think Debt relief companies need more regulation? For example, should they be required to refer people to a financial counselor or at least to mention that as an option?

Debt relief companies are regulated by the Insolvency and Trustee Services Australia and all debt agreements need to be lodged with the government regulator. We would consider it good practice for a debt relief company to mention a financial counselor as an option. One thing to be aware of is that financial counselors are still desperately under funded, while the government has recently made more funding available for financial counselors there are still long waiting lists for some services.