Why we shouldn’t be resting easy as our credit card debts fall
The nation’s whopping credit card debt has plummeted but there’s real cause for concern as we’ve just replaced them with buy now, pay later schemes. This is why it’s not going to end well.
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We should hold off congratulating ourselves on new figures showing the nation’s total credit card debt has plummeted.
There’s no denying we are a nation that loves racking up debt.
We’ve hooked ourselves up to the eyeballs in money owing on plastic and are sitting in second place on the global stage for the highest level of debt behind Switzerland.
It’s certainly nothing to be gloating about.
The Reserve Bank of Australia a few days ago released official statistics showing cardholders’ balances accruing interest on personal credit cards in November dropped to $27.2 billion.
This is the lowest level since December 2006 when it was $26.7 billion.
So we’re back now at debt levels that we were sitting on when Liberal Prime Minister John Howard was in office, Labor premier Steve Bracks was running the state and crocodile hunter Steve Irwin died in an accident.
So a long time ago.
But the reason we shouldn’t be patting ourselves on the back is because what we’ve really done is to replace one form of credit with another – that is in buy now, pay later schemes such as Afterpay, Zip Pay, Openpay and Humm.
And as a result we’ve created a younger generation of Australians who now think buy now, pay later is the norm.
Why save up for something and then wait to get it?
It’s all about instant gratification – get the goods now and worry about paying for them later.
And while the schemes argue this option is far better than racking up debt on a credit card and being hit by interest rates about 20 per cent, in most cases shoppers pay fees with the schemes and then get hit with extra charges if you don’t meet the strict repayment criteria.
Figures from the Australian Securities and Investments Commission showed the use of buy now pay later continues to surge.
The number of transactions using these schemes climbed from more than 50,000 per month in April 2016 to 1.9 million transactions in June 2018.
And the report also found 81 per cent of people using the schemes said it allowed them to spend up on expensive items they otherwise couldn’t shell out for in one payment, 64 per cent said it meant they would spend more than the otherwise would and 70 per cent make more spontaneous purchases.
So in other words we are wasting money on things we really don’t need.
For those unfamiliar with the schemes, it works like this.
A shopper buys an item – online or instore – they select a buy now pay later option available to them and pay off the item over a set time frame.
Some schemes are fee-free while others charge monthly account-keeping fees, and hefty charges apply if the strict repayment schedule is not met.
The growth in these schemes is mammoth and it is continuing to increase.
But don’t think it’s all smooth sailing for companies including Afterpay and ZipCo, after an internal memo by the nation’s central bank, the Reserve Bank of Australia, was released last week showing the schemes posed a risk to the country’s financial stability.
In simple terms, they were taking advantage of consumer lending laws and had not been “test in a downturn”.
Whenever I speak to financial counsellors about the schemes they shake their heads – they’re inundated every week with people seeking free financial help and most often they have these debts in tow.
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One industry expert told me many of those struggling to make ends meet prioritise making their buy now, pay later repayments ahead of everything else including paying for essentials like groceries.
The reason being if they don’t keep up with their repayments the schemes cut them off at the knees – they are no longer able to use them to spend up until they clean up their act and pay off their debt.
Failing to meet repayments can also result in a black mark on a person’s credit file.
While it’s a great thing to see our credit card balance accruing interest come down, we’ve still got a long way to go.
But what concerns me most is times have changed – and not for the better – younger generations are turning to these schemes to spend up on discretionary items.
And this won’t end well when these younger Australians want to make bigger purchases in life such as buying their first home where you have to save a decent chunk of cash first before making the biggest and probably most important purchase of your life.
SOPHIE ELSWORTH IS NATIONAL PERSONAL FINANCE WRITER
sophie.elsworth@news.com.au
@sophieelsworth