Credit cards surge in popularity but dangers lurk for consumers

People are putting more purchases on plastic as the cost of living surges, but this tactic threatens to punch a hole in their wealth.

Credit card use is climbing sharply. Picture: iStock

Soaring inflation and interest rates are helping to fuel a boom for credit cards, but using plastic to pay for higher living costs risks pushing people into a dangerous debt spiral.

New research from comparison website Mozo.com.au has found 75 per cent of credit card holders are spending more on their credit cards to pay for rising living costs, while separate data from credit analytics company Equifax shows card applications have surged more than 30 per cent.

Mozo says the average credit card interest rate is 17 per cent, but that hasn’t stopped spending growing at its fastest rate in 15 years.

“Many people have turned to credit cards to smooth over the inconsistency of their cash flow,” says Mozo spokeswoman Claire Frawley.

“However, this is not a long-term solution,” she says.

“When you use credit cards to pay for small everyday expenses, it can be easy to lose track of how much you have spent and ultimately blow your budget.”

Frawley says credit cards can be a great way to manage cash flow, and people can benefit from reward cards earning frequent flyer points, but they should beware of the pitfalls.

Mozo.com.au's Claire Frawley says it may be time to trade in a high-fee credit card.

“Don’t be tempted to withdraw cash from your credit card: not only will you be charged a high cash advance rate, but you’ll also start having interest charged on any cash withdrawals straight away,” she says.

AUTOMATE REPAYMENTS

“If you have a credit card with a high annual fee, it could be time to trade it in for a card with fewer bells and whistles. Unless you are using all the rewards program benefits, consider a low-fee credit card with no annual fee.”

People should aim to automate their card repayments to align with their payday, to help them avoid missing due dates and losing the benefits of an interest-free period.

Equifax’s new research shows credit card applications surged 31.5 per cent in the September quarter, compared with the same period in 2021, delivering the strongest growth of all credit types.

Equifax general manager advisory and solutions Kevin James says the rise reflects a range of factors, including:

• Credit card use normalising after two pandemic years of heavy saving.

• Consumers restarting international travel, where credit card use is widespread.

• Borrowers chasing lower mortgage rates and refinancing with new lenders, often with a new credit card too.

• First home buyers bouncing back after they cancelled cards during the recent housing boom to boost their borrowing power with banks.

“Managed appropriately, there’s benefits to credit card schemes, but using credit cards to manage day-to-day expenses and paying the minimum required payment means it becomes a very expensive line of credit,” James says.

CONSIDER ALTERNATIVES

He says for people who do not pay their card debt off in full each month and end up paying high interest, a credit card is “the wrong product”.

“Ensure that your credit card limit aligns to your monthly affordability.”

James says people should not draw cash from their credit card account to pay other debts, because this multiplies their overall interest bill.

“Talk to your lender and look for an alternative product or solution,” he says.

“They all have hardship support mechanisms – that was one of the best things coming out of the Covid era.”

Unrestrained spending on credit cards can deliver a nasty financial shock. Picture: iStock.

Defence Bank CEO David Marshall says in challenging times credit cards can help to better manage household budgets, “but it requires discipline in terms of making frequent repayments to reduce any outstanding balances you have and interest you may have to pay”.

“Review your current credit card rate, and don’t chase ‘too good to be true’ introductory credit card offers that often come with a host of conditions,” he says.

“Remember a credit card is a simple product we can all use, so avoid complicated offers.

“And review your expenditure, including looking at your statements to ensure you aren’t paying for services that you aren’t using.”

CREDIT CARD SPENDING SURGE

Mozo.com.au found that rising living costs mean:

• 43 per cent of credit card holders use them more for groceries.

• 37 per cent for day-to-day expenses.

• 32 per cent for petrol.

• 21 per cent for medical expenses.

It found one-third of people are using multiple credit cards.

Originally published as Credit cards surge in popularity but dangers lurk for consumers