Australia’s credit card and personal loan debt is posing a serious threat to the economy of Australia. As the Australian government struggles to get its own budget into the black, changing household incomes and rising living costs are effectively transferring public debt to private debt.
In the process, millions of Australian households can’t balance their household budgets and rely on personal debt just to make ends meet. Personal debt is wreaking havoc on the health and relationships of millions of ordinary Australians.
According to Reserve Bank of Australia data, there are 15.5 million credit card accounts in Australia and the average standard credit card rate is 19.75%. Our national credit card debt hit $51 billion in February 2015. Of that amount, $33.4 billion is accruing interest.
That is an awful lot of money wasted on unnecessary interest charges.
Generation X
Generation X consumers represent the largest contributing group to credit card debt. Gen-X describes those born between the early 1960’s and the early 1980’s. They have been identified as the group who owes the most on their credit cards and least likely to pay them off.
This is easy to understand considering where Gen-X is right now in the life cycle. These 35 – 50 year olds are currently going through the most expensive period of their lives where ageing parents, young children and mortgage commitments pose a serious challenge to household finances.
However, these cash draining lifestyle circumstances may not be the only factors at work here. According to comparison website Finder, half of the Generation X cardholders said they made up to three unplanned purchases each month using their credit cards. This supports the premise that emotional issues play a role in financial decision making, possibly as a result of stressful lifestyle circumstances.
Generation Y
Generation Y consumers are the most ill-prepared generational group when it comes to personal finances. Although born into the information age with instant access to financial information, these 20 – 34 year olds have the least practical understanding of sound personal financial planning principles.
Unlike the generations that have preceded them, Gen-Y has a tendency to spend a lot on rapidly depreciating assets such as computers, gadgets and phones. Gen-Y tends to live at home with parents much longer, so they are shielded from the realities of fending for themselves and building a sound economic future.
Gen-Y has never known life without credit cards as older generations have, so it’s a commonly held belief that immediate personal debt to fund discretionary lifestyle purchases is a legitimate financial strategy. It doesn’t help that there are plenty of lenders charging exorbitant interest rates, only too willing to accommodate them.
According to comparison website Finder, the Gen-Y group has a high incidence of giving in to a bargain with a credit card, and show a tendency to be secretive about their credit card spending.
The Wesley Report 14 was released in May 2015 by The Wesley Mission. Titled “Facing Financial Stress”, the report has lifted the lid on the extent of credit card misery in New South Wales. The research has shown that a staggering 44% of households in New South Wales are suffering financial stress and 38% are spending more than they earn.
That is more than one million households spending more than they earn and unable to make ends meet.
The report found that financial stress was more prevalent in New South Wales than it was when the same survey was conducted in 2010. The research identifies the population groups most at risk of financial stress as:
- Females
- Households falling into the lowest income bracket
- Households relying on government welfare as their main source of income.
Between 2010 and 2015 disposable income has decreased and an increasing number of households are spending more than they earn. The ability to manage spending has also declined over time with fewer households able to keep a budget, growing from five to 19 per cent since 2010.
An interesting point made in the Wesley report is that financial stress itself is different from financial hardship, as it takes into account an individual’s perceived stress, not only the actual financial hardship experienced as a result of physically not having enough income to meet expenses.
Credit card debt appears to be the key issue in financial stress. The report found that financially stressed households owe 70% more credit card debt than those not financially stressed.
Of even more concern is the 28% of respondents from household in financial stress indicated that they had suffered a diagnosed mental illness.
Household financial stress isn’t confined to parents. It affects everyone in the household. Furthermore, the people living with financial stress have difficulty feeling positive about the future and their ability to cope with future expenses and unexpected costs.
So what are banks and other debt institutions doing about credit card debt?
Sadly, the answer is nothing more than they are forced to do by the regulator. In fact they are providing financial incentives to encourage credit card use and disincentives for paying in cash. To banks, credit cards are the cornerstone of today’s modern payment system.
Why haven’t credit card interest rates come down with the cash rate?
Banks are more interested in exploiting the lack of competition in a market that relies on struggling Australians to build their profits and wealth.
What is the federal government doing to regulate the industry?
Very little, very slowly!
In 2012, banks were prohibited from promoting unsolicited credit card limit increase offers, unless consumers had consented to receive them.
At the same time, credit card providers were also required to direct repayments to the most expensive part of credit card debt first – making it easier to reduce debt.
In addition, monthly statements had to include personalised information such as how long it would take to pay off an entire balance if you only make minimum repayments.
It is not surprising to hear banks bleating that higher credit standards add to their cost of doing business, which further strengthens their justification of high interest rates.
There is still a long way to go.
Should the ongoing responsible lending obligations of credit card providers be reviewed?
Yes! Currently, lenders are only required to ensure a borrower can pay back a minimum monthly repayment, which is commonly only 2% of the balance owing. Responsible lending would suggest that a lender ensures that a borrower can repay the full credit limit on the card over a reasonable period.
Let’s hope that the weight of growing public opinion will soon prompt more action by the federal Government to change the money hungry culture and practices of banks and other credit institutions in this country.
Audrey Dawson is Director of Change My Fortunes
Change your mind and change your fortunes
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