Paul's Insights: Australians kick the card habit

Reserve Bank figures show the level of national credit card debt accruing interest has slid to the lowest in over a decade.

We collectively owe $29.5 billion on credit cards – a figure not seen since December 2007.

What’s especially remarkable is that the number of personal credit card accounts has fallen 2.03% year-on-year. There are now 301,749 fewer active accounts than there were in June 2018.

According to research group RateCity, it’s a sign Australians are starting to wean themselves off high interest debt.

For me, these figures tell several stories: Some good, some not so good.

The first is that Australians are realising credit cards are a costly way to fund purchases unless the balance is paid off before interest charges apply.

And, as RateCity notes, banks are tightening things up at their end. Card issuers are now assessing a person’s ability to repay their entire credit card limit within three years. As a result, credit limits have fallen to the lowest level in more than 3.5 years as new customers are being forced to cut back.

So far, so good. The downside is that other payment options have filled the gap.

Buy-now-pay-later services like Afterpay and zipPay have skyrocketed in popularity. In 2017/18 two million Australians used buy-now-pay-later options, up from 400,000 two years earlier.

The big concern is that buy-now-pay-later is especially popular among younger Australians. Three out of five users are aged under 34.

These arrangements may not charge regular interest in the way credit cards do, but they’re not without drawbacks.

Our money watchdog ASIC found one in six users had either become overdrawn, delayed bill payments or borrowed additional money because of a buy-now-pay-later arrangement.  Most consumers admit these arrangements allow them to spend more than they normally would.

Part of the problem is that buy-now-pay-later is not subject to the National Credit Act. Providers don’t have to meet responsible lending obligations, so it’s largely left to consumers to regulate their own spending, and for some people the temptation to overspend is hard to resist.

Taking control of your money is a key step in achieving financial security, and the only way to grow wealth for tomorrow is by spending less than you earn today. It may be old-fashioned, but regarding the balance of your everyday account as a limit for personal spending still makes a lot of sense.

Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.