Beware "financial blunders" when managing debt, consumers warned

Australian households are second only to their British counterparts when it comes to having high levels of personal debt - and not having the right strategy to manage the problem can lead to "financial blunders" that only make the problem worse, it has been claimed.

Newspaper the Australian warned that some consumers may be getting "too big for their fiscal boots" - as figures show Australian households now owe the equivalent of 158.6 per cent of their income in debts. This compares with 173 per cent of income in the UK.

There are a number of options available for managing debt, but consumers often make mistakes because of bad habits and ultimately, some of the practices do little to reduce the actual debt owed, it added.

For example, some consumers find it helpful to switch credit cards from one with higher rates to one with a lower interest charge. While this can be useful, they should avoid doing it every time a company offers, as instead of driving the debt down, it is just stretching it out.

Furthermore, these switches can appear on credit reports and an excessive amount might make a borrower less attractive to prospective lenders, the newspaper said.

Another increasingly popular way of trying to tackle debt is using a personal loan for debt consolidation, which rolls existing outgoings into a single monthly repayment.

The publication said these types of loans have increased by 24.3 per cent over the past 12 months.

However, debt consolidation is not a silver bullet and it will only work if consumers alter the spending habits that generated the debt in the first place, it added.

According to 2006 figures from the Australian Bureau of Statistics, average household debt including mortgages stood at $126,143.

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