On borrowed time

Australia's love affair with credit is as strong as ever, with latest data showing we have record debt levels, writes Anthony Keane

A NEW era of financial conservatism sweeping Australia has failed to stop our ballooning credit card balances, which have climbed 16 per cent in the past three years.

Aussies owe $47.7 billion on their credit cards, according to latest figures from the Reserve Bank, and $35.1 billion of it is accruing interest, compared with $29.4 billion in October 2007.

That’s an extra $5.7 billion we’re now paying interest on, about $855 million more a year based on an average credit card interest rate of 15 per cent.

In October 2007, confidence was high, with the share market reaching record highs, home loan interest rates rising, and no inkling that the growing debt problems in the US housing market would suck the globe into deep recession.

A Your Money analysis of spending, borrowing and investing trends since then has found that most areas have remained flat or contracted, except the credit card balances.

However, CommSec chief economist Craig James says the credit card data looks worse than it is, because the total figure does not take into account a rising population, rising wages and a rising number of accounts.

More than 370,000 new credit card accounts were opened over the past three years and the average balance has climbed from $2993 to $3253.

"The average credit card balance is up 3.8 per cent on a year earlier – the slowest annual growth in six months," James says. "People are more conservative and consumers are a lot more savvy now.

"A trend we are seeing is people are more inclined to make a purchase on their debit card. The other trend we are seeing is the use of cash."

Reserve Bank data shows we have become a nation of cash hoarders in the past three years.

In October 2007 bank deposits totalled $1.08 trillion ($1080 billion), and today it’s more than $1.4 trillion.

CommSec research released last month found consumers are cutting their spending in areas that in the past were seen as essential – gambling, cigarettes and alcohol – in preference for small luxuries.

"While Australians have generally become more careful with their spending, there is still a place for the little luxuries," James says.

"The category ‘personal effects’ which included items like jewellery, watches and clocks lifted by almost 8 per cent over the past year. And perhaps this penchant for little luxuries is the reason why hotel accommodation has lifted – more Australians deciding to take long weekends instead of their normal, longer annual leave."

AMP financial planner Mark Haynes, of Haysman Financial Services, says retirees have been taking a much more cautious approach to investing and spending.

"There is no doubt that during the global financial crisis, retirees generally stopped major spending and travelling, and a high percentage reduced drawings on their allocated pensions to help retain more capital," he says.

"We are, however, now seeing this starting to reverse and retirees are again feeling more at ease."

Haynes says there are many retirees who now qualify for Centrelink benefits because of their reduced assets and new income and assets test rules.

"It is very important for all retirees to review their situation following the GFC to see if they now qualify for any government benefits," he says.

Consumers are benefiting from the strong Australian dollar, making big-ticket items such as whitegoods and TVs cheaper, Haynes says, but he warns people not to get carried away with using credit and interest-free finance.

"These purchases really should be paid off before they cost 18 to 24 per cent more in interest," he says. "Living a borrowed lifestyle is the quickest way to get into debt. If you can’t afford it today, chances are you won’t be able to afford it tomorrow."

Sourced from cairns.com.au

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