Debt is a major source of stress. It’s linked to mental and physical health issues and is a source of relationship conflicts for 1 in 5 New Zealanders.
Research from 2019 showed that 82% of New Zealanders aged 18-34 are worried about money. Almost half report feeling stressed about money while over 30% miss out on social activities and don’t access health services due to money woes.
It is easy to be caught out by debt traps - offers that seem like a good deal up front but actually can trap you in a long-term debt cycle. Before you know it, your debts grow, you borrow from one place to pay another, and it takes a toll on your well-being.
We’re going to expose some of those debt traps so you can learn how to avoid them and save yourself the stress of drowning in debt.
6 debt traps to watch out for
Remember that when you take on a debt, you’re borrowing from your future self. Avoid setting yourself up for a future of debt by arming yourself with knowledge. Here are our tips for what to look out for.
1. Credit cards with more fees than benefits.
Credit cards come with fees for late payments, going over the limit, cash advance, balance transfers and some have annual fees.
There are also surcharges for using a credit card, which some retailers absorb but others pass on to the customer - say when you book theatre tickets or a flight, you often pay the extra card surcharge. In New Zealand there is no limit on what card companies and banks can charge as a surcharge.
As far as rewards programs go, some are great, like cash-back or travel rewards. You just have to make sure you know the details and if it is useful to you. If you’re paying for the reward and not using it, it’s not really a reward.
Buyer beware: Check your credit card details for fee information and benefits and make sure you are getting a fair deal.
2. Buy now, pay later schemes.
It’s tempting to get what you want right now and pay for it later. It can be helpful in instances where you need something urgently - like your phone stops working and you have no way to be contacted - but it can also encourage you to make purchases you otherwise would not have made. Maybe your phone works perfectly fine, but that shiny new $1000 phone looks pretty attractive if you have ten weeks to pay it off.
Be aware of any interest or late payment fees that can make this type of debt drag out. You could end up in a longer-term debt, paying more than you planned.
Buyer beware: Make sure you’re not spending more than you would normally have.
3. Payday loans.
These are short-term, quick loans meant to tide you over for a few weeks. You get the money fast, but the trade-off is high interest rates and fees. There is often an establishment fee, monthly fee, late fees, direct debit fees and loan extension fees which can quickly cause your debt to escalate.
The real debt trap danger lies in the astronomical interest rates - we’re talking 500% or more. And if you miss the payment deadline, interest accrues every day. Payday lending is unregulated in NZ so they can charge whatever they like.
Here’s what that could look like. Say you borrow $500. With fees, the amount you pay (usually within 2-4 weeks) is $590. If you don’t pay it back, interest is charged every day. At an interest rate of 500%, the amount due goes from $590 to $730 in one week! It becomes harder and harder to pay it off, trapping you in a cycle of fast-growing debt.
Buyer beware: Try to save an emergency fund so you can avoid paying interest when you’re in an urgent situation. If you use a payday loan, plan carefully to ensure you pay the full amount back when it is due.
4. Overdraft protection.
Overdraft protection is like a safety net for your bank account. If you have automatic payments set up, but not enough money in your account, your payment will still go out. This is a convenience if you would otherwise be facing late payment fees or dishonoured payment fees.
However it is tempting to spend that overdraft like it was actual money in the bank. Suddenly you find yourself owing the bank a couple grand, they’re charging you interest on it every month (and for some banks, daily fees) until it is repaid. It is a cycle that can be really difficult to get out of.
Buyer beware: Overdraft protection can be a good thing but talk to your bank and make sure you know just what you’re getting into.
5. Emotional debt traps.
Christmas is coming. Your best mate’s having a birthday. It’s Mother’s Day and you really want to show your mum how much you appreciate her.
These can quickly become emotional debt traps. You want to treat your loved ones, show them a good time or take the family on a trip. After all, they’re worth it!
Our emotions can drive spending habits out of control, winding you up with debt that takes years to pay back. Your loved ones don’t want to see you suffer in debt for them.
Buyer beware: If you can’t afford it, don’t buy it. Show that you care in a less expensive way.
6. Accepting debt as a way of life.
Societal expectations make us feel pressured to have certain things. Car loans, mortgages, credit cards - it can feel like it is simply expected that you will live with these debts. Many people accept them as lifetime payments that will just always be there.
This is a mindset that you can change. You don’t have to buy anything, ever. Especially if you can’t actually afford it. Better to budget, save and purchase with confidence.
Buyer beware: Check your motivation for buying something before going into debt. Do you need it now, or can you save up for it?
Save for your future self
Debt traps will put your future self in financial hardship for years. The best way to avoid debt traps is to be educated about them. Getting financially literate will not only save you money but give you peace of mind.
Our mission is to help New Zealanders get their KiwiSaver fund sorted. It is the simplest way to save for your future self. With automatic contributions from your wages, contributions from your employer and the government, you can quickly get a good start. Your KiwiSaver fund is invested for you, depending on your risk level, timeline, goals and personal values, so you can watch your nest egg grow over time.
Get your KiwiSaver sorted with just a few clicks and get started saving better.