3 forgotten fees and how to avoid them

Estimated reading time
 3 min

In this article

• Three types of fees that can sometimes get forgotten
• How to avoid fees that come with debt
• Why framing your debt can affect how you feel about it

Whether it’s giving your kitchen a modern makeover, buying a cosy apartment in the city, or even just covering our day-to-day essentials, we’ve all got our reasons for taking on debt.

However, the increased cost of living has been hitting borrowers hard. According to a report from the Reserve Bank of Australia (RBA), a small (but increasing) number of Australian borrowers are on the cusp of financial stress, which is when it’s difficult to meet basic financial commitments. ^disclaimer

Despite this, many Australian households are continuing to make repayments on their debts.^disclaimer What makes these Aussies so resilient is their focus on making their payments on time and avoiding the fees we sometimes forget about that can catch anyone off guard.

That’s why we’re here to break down three often forgotten costs associated with debt, so you can become more financially resilient and stay on top of your repayments.

Remember, always do your research: read the T&Cs for your product and work out what is best for you and your circumstances.

1. Late payment fees

Between work, your family, and looking after the dog, you might forget to make a debt repayment on time. When you miss a payment, your lender might charge you a late fee.

Aside from increasing your debt, late payments can also impact your credit score, which is a number (or rating) that can influence how much you can borrow and the interest rate available to you. When your credit score is impacted in this way, it might affect your chances of taking out another loan in the future for a different reason, like buying a new set of wheels or a house. 

These fees can also quickly increase how much you need to pay back and make your debt harder to pay off.
 

  Quick tips to avoid late fees

• Consider setting up automatic debt repayments on the day (or the day after) you get paid. This allows you to pay your debts first before you divvy up your money into budgeting buckets or spend it on something else. 
• Create reminders on your phone or a calendar (or both) to help you stay on top of your debt repayment schedule. 
• Review your budget regularly. Don’t have one? Then consider building a budget that factors in your debt and current financial situation. You can use our handy budget tool if you need one. 
• Consider whether the snowball debt payment strategy might work for you. This strategy involves focusing on paying off smallest debt first, then moving onto the next smallest, and so on. By clearing small debts quickly while still making your minimum repayments on the rest, you might be more motivated and feel more positive about your debt position.

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2. Overlimit and cash advance fees

If you exceed your credit card limit, you might be charged an overlimit fee. For instance, if you splurge on a new laptop when your credit card is at its spending limit, you might be charged a fee. 

If you use your credit card for cash advances, such as withdrawing some cold, hard cash from the ATM or loading up a pre-paid gift card, you might incur a cash advance fee. Cash advances may also incur a different interest rate, so it is important to know your credit card terms and conditions.

Both types of fees can add to your debt total and make it trickier to pay it off. When considering if you are likely to exceed your credit limit, don’t forget to take into account any recurring payments set up on your credit card.
 

  Quick tips to avoid overlimit and cash advance fees

• Use your debit card for cash withdrawals instead of your credit card where possible.
• Keep track of your credit card transactions and consider a ‘spending reset’ where you limit using your credit card for a month and spend the bare minimum. Spending mindfully can help you become more aware of your credit card limit and avoid additional fees. Who knows, you might even find clever ways to cut back.
• Make note of all your recurring payments and direct debits and see which ones you can cancel, pause, change or reduce (either the account, date or amount) to avoid exceeding your limit.

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3. Interest 

We know what you’re thinking – how can someone ‘forget’ about interest when the rising interest rates have been in the news for the past few years and hurting our hip pockets? But this is a big part of debt repayment that many people don’t factor in, which can blow out repayment schedules and have you paying significantly more over time.

Whenever you borrow money, you’ll have to pay back the amount you borrowed (called the principal) and the interest you accrue. Debts that incur interest (such as personal loans or credit cards) can quickly increase the total amount you owe to your lender over time.

Depending on the product, the applicable interest rate might fluctuate depending on the current economic climate: if the interest rate on your product increases, this could impact your ability to pay off your debt. 
 

  Quick tips to stay on top of your interest costs

• Keep an eye on what’s happening with interest rates more broadly and consider whether you should adjust your budget or payment strategy. For example, if interest rates increase and your debt increases, update your budget or switch up your repayment strategy to reflect this change.
• Make sure you’re paying both the principal and interest on your loan to make headway on your debt. 
• One tactic for managing debt and avoiding fees is to consolidate your debt into a single loan so you’re only paying back interest on the one loan. Before consolidating or taking out any new products, always check the T&Cs, fees and charges and eligibility criteria, to work out whether it’s the right option for you and your circumstances.
• Try to look at your various debts through the lens of the interest rate. The avalanche method of paying off debt focuses on paying off the debt with the highest interest rate first, however, it can help to convert them into dollar amounts to get an understanding of which debt is the most expensive. Make a list of all your debts and work out the monthly interest being accrued (debt x interest rate = interest cost), this can help you to decide which debt to pay off first (particularly if you have several debts with the same interest rate but differing amounts owing).

Example – debt priorities table

If you choose to pay off your debt based on the highest amount of interest you’re being charged, the table below illustrates how you could prioritise your debts. As you can see, just because a loan is bigger, it doesn’t mean it should necessarily be the top priority.

  Brain hack

No matter your reason for taking on debt, it can make us feel anxious to know that it is there. 

Enter the framing effect^disclaimer, which is where our decisions and mood can change depending on how information is presented to us. For example, if your debt is framed as a potential loss because you’re accumulating interest, then you might feel more stressed to pay it off. But you can reframe this thinking and focus on how you can save money by paying the balance off earlier. 

When you’re looking at your list of debts, think of how you can reframe the situation and consider your plan of attack. If you’ve got a big debt, maybe you can focus on paying it off (and feeling good about it!) before tackling smaller debt. Or you might start with the smaller ones to build up your debt-paying confidence and gradually tackle the largest one later. 

You can download and use our debt management tool (xlsx) to help you map out your debt, find a repayment strategy that’s right for you and track your repayments as you go.