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July 2017

New Zealand has High Household Debt Levels – But Does It Matter?

When compared to the size of our economy, New Zealand’s household debt level is one of the highest in the developed world. But one economist argues that how much debt we have is not as important as whether we will be able to pay for it in the future.

In 2015, New Zealand’s household debt level was 91.3 per cent ranking us seventh highest out of 42 countries. Paul Bloxham, HSBC chief economist for Australia and New Zealand, says distribution and serviceability is more important than debt size.

When consumer credit soars, such increases in the levels of borrowing can leave households over-indebted and vulnerable. However, when interest rates are low and there is solid jobs growth and a favourable distribution of debt together with tightened lending standards, risks to households with high debt can be manageable.

Bloxham cites the US sub-prime crisis, saying the problem was lending to people who could not afford to service the debt, rather than high debt levels in themselves. The question for NZ was then around whether banks and financial institutions had been lending to households that could continue to service the debt, especially in Auckland where house price growth has been rampant.

Bloxham says there are a number of reasons why New Zealand ranks so highly up the international ranks for household debt. Partly it was because housing made up a larger share of household wealth than other countries because house prices were higher.

Our high debt was also down to the high number of individuals who own investment properties. In other countries, like the US, investment properties tended to be owned by corporates, so the debt did not show up on household balance sheets. “Here households own it directly,” says Bloxham.

What Are the Different Types of Good and Bad Debt?

Not all debt is equal; there is good debt and bad debt. If you are a debtor, debt is good if it will help you accumulate wealth in the future. Good debt is something that you will make money from over time such as home loans, student debt, or borrowing to expand your business.

Just by regularly paying down your debt you can benefit. That’s because you build up a good track record in your credit file, making it easier to borrow when you need ‘good debt’ in the future. A good record may also mean you benefit from lower interest rates, or at least avoid higher ones.

Bad debt, on the other hand, is lost money. Debt is bad when you’re borrowing unnecessarily for goods or services that won’t help you financially in the future. It usually means you’re living beyond your means and falling behind financially.

From the perspective of the creditor, good debt will be paid within an agreed timeframe, potentially with interest, depending on the agreement. Bad debt is the debt that is not collectible and will need to be written off.

Bad business debt could result from lending money to an unreliable customer, a customer whose circumstances suddenly change, or from fraud. Sometimes the cost of pursuing a debt through a debt collection agency is not worth the value of recovering it.

Most businesses make sales on credit. This debt is treated as an asset however, it is typical to have some provision for bad debt in the accounting process to try to protect themselves from write-offs.

Debt collection software such as iCollect is a highly effective way for businesses to deal with late and unpaid bills – better to find a way for the debt to be collected than end up paying for it yourself!

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Last week, the United States equivalent to the Medical Products Agency, FDA, approved a new drug - Addyi (flibanserin 100 mg). The Sprout Pharmaceuticals supplier certainly cried up a bottle and journalists around the world wrote about this little pill. For Addyi is not any pill, it's the long-awaited pink Viagra.

Thus, a medicine that is expected to revolutionize women's most common sex problems (low lust) in the same way as Viagra revolutionized men's most common sex problems (erectile dysfunction) when it came in 1998. And clearly everyone wants to rewrite pink Viagra, everyone wants to rewrite sex, especially when It gets a nice scientific setting.

The subject of Pink Viagra comes up in the media on a regular basis and the conversation follows about the same pattern. In one corner, cheerful insistence that science can finally be close to finding the key to women's sex drive. In others, one and another feminist chronicle concludes that women may not want to lie because they take the main responsibility for the home and the children. The fascinating thing is that in the middle of the conversation about sex and science is the obvious few who actually talk about science.

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