High interest rates unsettle users
Credit card users are being more cautious than ever when it comes to slapping purchases on their plastic – conscious of high interest rates and the impact on borrowing capacity, say finance experts.
New research from RateCity.com.au reveals that while credit cards are being used more frequently, by more people, debt levels are dropping.
RateCity’s research director Sally Tindall (pictured above left) said while credit cards might be making a comeback, Australians were using them more wisely.
“It’s remarkable to see credit card debt drop for the fourth consecutive month, despite a rise in both the number of accounts and the value of purchases made in September,” Tindall said.
“At $17.27 billion, Australia’s total credit card debt attracting interest charges is still way too high, but at least it’s moving in the right direction at a time when many family finances are under extreme pressure.”
Tindall said while not everyone refrained from using credit cards to plug a hole in their budget, the data suggested some Australians had wised up to the pitfalls of this strategy.
“If you’re having trouble balancing the budget, don’t reach for the credit card, because if you can’t clear that debt when your next bill comes around, you’ll end up with an even bigger problem on your hands.”
Finance broker Jacob Thorne (pictured above right), of Melbourne-based Port Finance Group, said borrowers were generally aware that credit card debt would impact their servicing capacity.
“But to what extent is probably understated as a rule,” Thorne said. “Lenders look at credit card debt much more conservatively from a lending perspective and as such they have a big impact on what customers can borrow for a home loan.”
Thorne, who works with clients on residential property purchases and refinance, SMSF lending and commercial finance, said most borrowers were looking at their spending before seeking finance, though reducing, or eliminating a credit card, wasn’t usually considered.
“Reducing credit card debt is one of the easiest and most effective ways to increase borrowing capacity without necessarily changing spending habits. Lenders will always factor in credit card limits when assessing customers borrowing capacity for either a purchase or refinance application.
“The actual spending patterns and usage of the credit card are less scrutinised than the overall limit associated to the loan.
“Often discussing with a client around how many and how much credit they will actually use is important in ensuring they don’t have excess debt that they’re not using.”
Thorne said recent economic conditions were affecting consumer consciousness when it came to spending.
“We have come into a period of rising interest rates and inflation which has meant people have been looking at how they spend their money a lot more.
“We have seen a big swing over the last couple of years from being in a COVID-impacted world where everyone was stuck at home and savings buffers were increased and expenditure obviously reduced, to an opening of the door on spending and inflation.”
Thorne said with the rising cost of living affecting households, consumers were looking at ways to reduce their costs – with credit card debt an obvious place to start.
A study by Equifax, undertaken at the end of 2021, revealed an estimated 500,000 Australians have moved away from credit cards and personal loan debt.
Do you think Australian are more aware of credit card interest rates and the impact they have on borrowing capacity? Share your thoughts below.
