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How to avoid the Christmas debt hangover this new year

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For the first time ever, Australia's household-debt-to-income has exceeded 190% after roughly tripling since the late 1980s. This means the average Australian household is holding debt that's almost double their disposable income.

The fact is a lot of us have debts we need to keep under control, but this debt often rises over the festive season as we buy gifts, host family and friends, and travel.

Debt can be detrimental to your financial success if you are not careful in managing it.

Here are some tips on how to manage debt responsibly and avoid the new year debt hangover.

avoid a debt hangover this christma

Know where your money is going

It's easy to put off doing this, but a good starting point when it comes to managing debt is to be aware of what money you have and where it is going.

Just because it is Christmas doesn't mean the regular bills and payments won't be due - so make sure you put money aside for those first.

Take stock of all your debt before taking on any more

If your debt is already looking unmanageable, try to find ways to cut back your spending rather than increasing your debt further. This alone won't get you out of debt, but it will help you to regain some control over what you owe.

Easy credit isn't free credit

There is plenty of cheap or easy credit on the market - whether that's buy now, pay later or an interest-free credit card offer - but that doesn't mean it's good credit.

Even if your credit is interest free, the golden rule for any form of credit is to only use it for things you really need and can afford to repay.

Just because something is on special, or you need to buy lots of Christmas gifts, it doesn't mean you should necessarily add to your debt to buy it.

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Understand that a debt hangover can last beyond the new year

How you handle your debts over the Christmas period will be reflected in your credit report.

Lenders will look at your credit report to determine how you are managing your existing debt when you apply for credit or a loan. So, if you get into trouble and start missing repayments in the new year, that debt can affect your eligibility for credit for some time.

If you have a credit card, personal loan or home loan, your credit report includes information about your borrowing behaviour and credit history. This means lenders have access to a 24-month track record of how you pay your accounts.

You can get a free copy of your credit report each year from the three main credit-reporting bodies. This will give you an indication whether there is something on your report that is incorrect or is making it harder for you to borrow.

Pay on time

At busy times of the year like Christmas, it can be easy to let bill payments slide, but paying on time is essential to managing your debt responsibly.

If you have a credit card or loan, always check the due date on your statement. If you are in the habit of missing payments, talk to your lender or credit card provider about setting up an automatic payment or direct debit to keep you on track.

When using buy now, pay later products, it's a good idea to keep a close eye on the incomings and outgoings in your account, and to stay on top of your scheduled payments. Late payment fees can really add up and increase your debt further.

Christmas is a wonderful time to celebrate, but too many of us succumb to the pressure to overspend at this time of year. So, plan ahead, spend responsibly and stay on top of your bills to avoid the new year debt hangover.

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Mike Laing is executive chairman of the Australian Retail Credit Association, which founded creditsmart.org.au to help consumers understand how credit reporting operates in Australia. He has served as a director and chair of various financial services and payment companies and has led businesses in Australia, New Zealand, the United Kingdom, and Ireland. Mike holds a Master of Commerce (Hons I), is a graduate member of the Australian Institute of Company Directors, and a member of the Chartered Institute of Arbitrators.
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