The lure of credit can be tempting, offering shoppers the freedom to buy whatever they want, whenever they want and leave the bill for later.  However, without exercising caution, this can leave very nasty repercussions that can lead you down the path of excessive interest and high debt, sometimes paying many times your original purchase cost and leaving you in the lurch.

The best way to avoid debt begins with taking a careful look at your spending habits. If you are considering taking a loan or buying on credit, you need to ask: do I need this right now? As loans often carry heavy interest, especially smaller ones, it will dramatically inflate the costs of what you plan to buy.

If it is something vital to buy (be it replacement whitegoods, emergency repair work or medical costs to name a few), then consider your alternative options. You may be able to take out a payment plan, find a cheaper alternative or apply for a NILS (No-interest Loan Scheme) to avoid paying with credit, or taking out an interest heavy loan.

Not all debt is bad debt, and in a lot of cases can actually help you to earn money in the long run through interest earned, rent payments or income. Examples of good debt include:

•  Education
•  Small Businesses
•  Property
•  Investments

In theory, these debts work for you, generating money or in the case of education, increasing your opportunity to enhance your cash flow through further employment opportunities. What is also important to note is that these debts are not a guarantee that you will make money. Education may not be in a relevant field, or may not be high enough to edge out competition in the job market, Small businesses may not succeed as intended, property carries heavy maintenance fees with no guaranteed increase in value and investments require careful tending to so they can succeed. Keeping an eye on these loans is essential to ensure that they don’t spiral out of control and turn to bad debt.

With the good comes the bad however - there are a lot of debts that have very little benefit to your finances and in many cases will act as a detrimental money sink until you can remedy them. Examples of these include:

•  Vehicles
•  Non-investment purchases
•  High-interest debt

These debts are highly dangerous, as they will continue to create unnecessary additional payments until paid off, without holding or gaining value to mitigate the additional cost. Vehicles and non-investment purchases are particularly bad for this, as their resale value decreases dramatically after purchase and does not recover. High-interest debt leads to this occurring much faster, with even “good” debts with high interest drawing more money in interest than is earned.

So you have found yourself to be in debt, and you’re not entirely sure if you will be able to handle the interest and repayments. With the ratio of Australian household debt to disposable income tripling since 1988, you can rest assured that you are not alone. However, to avoid allowing the situation to grow worse, there are a few important steps you can take to help turn your debt back around.

One of the hardest parts of the process is admitting to your loan provider that you can foresee difficulty, or are having difficulty making repayments on the loan, but it happens more often than you may think. If you find yourself in a bad situation, it is better to contact your loan provider immediately, before missing any payments and possibly damaging your credit score. Your main aim will be to renegotiate your repayments to a lower level on a temporary or permanent basis. Being honest with your lender is vital to this process, and negotiating payments you are able to meet is important too. To determine what you are able to effectively pay on an ongoing basis, writing a budget is a handy option that will help you to set aside the right amount of money for repayment, as well as possibly save more money overall.

To assist you in making regular loan repayments, a budget will help you to better control your cashflow, leaving extra funds to address your debt. When making a budget, the first step is to gather as many current financial documents as possible, such as receipts, bank statements, pay slips and invoices. This will allow you to calculate your total monthly income. Following this, you will need to add up your essential monthly payments, comprising of elements like utilities, rent, auto costs and groceries, then subtract it from your total monthly income.

Following this, you will be left with your monthly disposable income, which will go towards savings, leisure and loan repayments. It is important not to allocate these remaining funds exclusively to one of these, as although you may be keeping up a higher repayment rate on your loan, it will leave you with no money to live life to the fullest, or save an emergency nest egg. If renegotiating your loan repayments, it is important to keep this figure in mind, as this will be the amount you can reliably repay while still taking care of every day responsibilities.

If the amount left over after your essential payments is slim, none or even in the negatives, you will need to potentially make some compromises in your essentials, such as overhauling your grocery shop by buying more cost effective options in bulk to reduce long term cost, choosing alternative transport or in dire scenarios, moving to a cheaper rental solution until you have repaid your debts in full.

Another option to consider is to consolidate your debts, letting you optimise your interest by paying off inefficient loans with lower interest options.