Number of credit and charge card accounts is about to top 15 million for the first time, resulting in an average debt of $3321 a card / File
- Aussies owe $49.3bn on credit cards – RBA
- Average credit card holder has a $3321 debt
- Higher costs of living ‘hitting households’
AUSTRALIANS owe almost $50 billion on credit cards as spiralling living costs force them to put everyday expenses and even mortgage repayments on plastic.
Reserve Bank of Australia statistics reveal the national credit card debt has climbed 42 per cent in the past five years to $49.3 billion, with $36 billion accruing interest.
The $2.87 billion increase has stunned experts with figures showing the average credit card debt of $3321.
While that may appear to be manageable, on a national scale our credit card addiction is one of the world’s most severe. Nudging the Budget deficit in size, it would be enough to pay off the average $300,000 mortgage of almost 170,000 homeowners.
Debt Relief Australia spokesperson Deborah Southon says the typical family credit card debt is likely to be much higher than the $3321 average with many households juggling repayments on two or more cards.
More than 70,000 Australians visit the debt resolution site each year seeking help.
It is not uncommon for single households to incur tens of thousands of dollars in credit card repayments with families increasingly relying on plastic to meet higher costs of living.
“It’s not just the number of people who come to us for credit card debt resolution that’s alarming but the extreme level of debt they are in,” Ms Southan says.
“We had a client recently who owed $450,000 and was on a salary of $40,000. She had ten credit cards and was using one to pay off the other. By the time she came to us she was almost suicidal.”
Ms Southon says it’s not surprising that more Australians are sliding into the debt every month, with credit card companies constantly devising new ways to lure cardholder to make more purchases and conduct more transaction, such as rewards programs and special offers.
Blinded by the incentives, consumers lose sight that credit cards are one of the most expensive ways to borrow money, she says.
“Lives can be destroyed by credit card debt, more couples break up over financial stress than infidelity,” Ms Southon says.
“People have these huge credit card debts and no assets through that spending because they are buying goods which depreciate in value.”
The risk increases tenfold when households and businesses are under both credit card and mortgage stress, she says.
“You have people who are paying $500 a week on a mortgage and then servicing a $40,000 credit card debt on top of it. You need a substantial income to be able to afford that. Most of middle Australia can’t cope with that sort of debt.”
This massive mountain of debt will continue to escalate indefinitely with many lenders charging interest rates on credit card accounts four times higher than the official RBA cash rate of 4.75 per cent.
More than two-thirds of consumers’ outstanding debt is accruing interest at the average rate of nearly 20 per cent – a 20-year high.
Ms Southon blames lenient lending criteria prior to the GFC – tighter rules came into play under credit card reforms in January – and a spending binge fuelled by the Rudd Government’s first home owner grant and the stimulus package.
Before the reforms, credit cards were being approved to households and businesses with low documentation or no documentation at all.
Today there are more than 14 million credit cards in circulation in Australia, with almost every adult owning at least one.
And experts warn the financial headache will get worse before it gets better.
The RBA is expected to increase the official cash rate from next month and credit card holders squeezed by mortgages are extremely vulnerable to rate rises – families already buckling under the weight of household costs won’t be able to tolerate increases to their repayments.
More Australians will default on credit cards, homes, businesses and cars will be repossessed, relationships tested and lives left in tatters.
Ratecity CEO Damian Smith blames society’s spend-now-pay-later culture.
“Credit cards are the easiest form of debt Australians have access to. It’s the simplest loan for most people to get approval for and the most flexible to use,” Mr Smith says.
“Most credit cards have a minimum repayment of 2 percent each month and unlike most other types of loans, there is no time period to pay it off. This becomes dangerous because people can get caught with a never-ending debt.”
Mr Smith says the rising Australian dollar has added to credit card woes by boosting online shopping, and with no short-term end in site for the currency’s ascent will continue to.
While credit card debt is crippling households, it also impacts on the health of the nation.
Maxing the plastic stimulates the economy in the short-term, says J.P. Morgan economist Helen Kevans.
“But, should consumers get too deep in debt, spending is reined in or ceased altogether, dampening private consumption, which in Australia’s case accounts for a substantial 54 per cent of GDP,” Ms Kevans says.
“When debt becomes unmanageable, it can only affect the economy adversely. Consumption slows, the broader economy slows even more, leading to job losses and even less spending – a vicious circle.”
Ironically, the major benefactors of the credit card crisis – lenders – will end up wearing consumers’ pain. They will be forced to cut back on borrowing as a result of defaults, which today’s RBA figures indicate are only on the way up.
Tips – How to make your debt more manageable
Get organised – you can’t manage your debt situation effectively if you don’t know exactly where you stand. Write down your balances for each credit card, minimum payments due, annual fees, and interest rates for each.
Pay off your smallest balances first – your credit card with the lowest balance will probably be the quickest to pay off. So prioritise that rather than thinking about the huge lump sum you owe across all debts. Paying off something, even if it’s the smallest debt, can motivate you to keep on going.
Consolidate – see if consolidation will make monthly payments more manageable. Find a deal that lets you consolidate debts with lower required monthly interest. Just know there’s also more risk if you default on the larger consolidated debt.
Consider balance transfers – Even if you don’t want to consolidate all of your debts, you could consolidate a few or you could move some from high interest cards to lower interest choices.
Tap into other funding sources – Maybe you have other savings or investments you could utilise. As long as your outgoing interest on your debt is higher than the interest you earn on those savings and investments, your money is better put towards getting rid of that debt.