Dangerous debts risk trapping cash-strapped consumers in spiral

A dozen RBA interest rate rises and surging living costs are prompting people to take drastic measures to pay their bills.

Consumers are turning to high-interest, short-term loans to combat the cost-of-living crisis, raising their risk of suffering a debt spiral.

New research by credit bureau Experian has revealed a 54 per cent increase in new credit card enquiries in the past two years, a 42 per cent rise for buy now, pay later debt and a 36 per cent jump in personal loans.

It reverses a trend of credit cards declining in popularity last decade and during the early days of the pandemic.

Experian director of client advisory, credit services, Charlotte Rankin said consumers were being squeezed by higher mortgage repayments, rising rents and higher household costs.

The Reserve Bank’s cash rate increase on Tuesday, from 3.85 per cent to 4.1 per cent, turns the screws even tighter.

“General expenses are going up – gas and electricity bills, petrol, food in the supermarket … you have cashflow pressure for consumers,” Ms Rankin said.

“Consumers who have got mortgages through a variable rate have seen that immediate impact of the cash rate increases. They might be cancelling things like Netflix, but you have still got to go and buy food.”

Short-term credit such as buy now, pay later and credit cards can be a trap. Picture: iStock

Ms Rankin said new credit accounts were growing at the same rate as enquiries.

“With credit cards specifically, pre-Covid we were seeing a general decline in the use of credit cards,” she said.

“What we have seen with this recent shift is the opening rate of new accounts has picked up again.”

Finance specialists say people using credit cards and buy now, pay later (BNPL) schemes to help cover rising household bills can find themselves sinking deeper into debt.

Recently-announced plans to regulate the BNPL sector were welcomed by Experian, and Ms Rankin said they could help consumers.

“If you open five BNPL accounts and they all have a $2000 limit, that’s an extra $10,000 of unsecured debt that somebody has, and that does make a difference in your ability to repay it,” she said.

“Having some checks and balances in place isn’t a bad thing.”

Financial Counselling Australia chief executive Fiona Guthrie said “too many” counselling clients had multiple BNPL accounts, while consumer group Choice CEO Alan Kirkland said one in four BNPL users had to cut back on essentials to pay BNPL fees or debs.

Consumer Action Law Centre CEO Stephanie Tonkin said people in hardship were skipping meals to prioritise repaying BNPL. “The amounts borrowed can quickly spiral with late fees and charges,” she said.

Experian’s Ms Rankin said people worried about debt should speak with their banks and other credit providers.

“They have hardship programs,” she said. “Go and talk to them before you get too stressed. Don’t let it get on top of you. Don’t bury your head in the sand”

Separate research from Canstar has found mortgage holders are making “drastic financial changes” to cope with rising interest rates.

It survey of 669 borrowers found 47 per cent had made home loan changes such as refinancing, tapping into mortgage redraw or offset, and extending their loan term.

“Lenders have hardship provisions for borrowers who have exhausted their own resources and may offer an extension to the loan term or to briefly switch the loan to interest only to provide lower repayments,” Canstar spokesman Steve Mickenbecker said.

Originally published as Dangerous debts risk trapping cash-strapped consumers in spiral