Why is household debt through the roof?

Many people struggle with debts from time to time, but what’s alarming of late is the amount of debt people are willing to take on.

With interest rates at all-time lows, at least with housing, why are we in more debt than ever?

It’s a complex question. There are several factors contributing to this impending tsunami of debt.

Availability of credit

While some areas of lending are definitely firming up, such as home and business loans, the banks and other lenders still seem quite happy to approve high interest rate products like credit cards and payday style loans. It’s no mystery why. Where else is a lender going to generate those sorts of returns?

We regularly see people with far from excessive incomes that have over $100,000 of credit card debt. How does that even happen?

Think about $100,000 burning away at up to 20% interest, sometimes more. Many of these people never even touch the principle as they are flat-out just trying to keep up with minimum payments.

It seems odd that while there are strict responsible lending guidelines in place for most types of loans, there area still some lenders that will provide credit at very high rates to very vulnerable people all in the name of profit. I know that people need to take responsibility for their actions, but from what I’ve seen, some of these lenders are just damn right predatory and it needs to stop.

Running on the assumption that if you give people money they will spend it, lending behaviour is part of the problem.

Spending behaviour

I want it and I want it now! This seems to be the way most of us think these days.

There’s really no such thing as deferred gratification anymore. If we want it, we buy it, even if we can’t really afford it and the availability of quick and easy credit makes this all possible, at a price of course.  

Payment methods like “tap and go” really do change spending behaviour. When you buy something by just waving your card over a box does it feel like you’re spending money? Not really right? It’s so easy… you pick up the item you want, do a little magic swipe of your card and presto. The problem is you did just spend money and possibly money you didn’t really have to spend.

Now let me ask you another question; imagine you were paid in cash and had no credit cards. You walked into a store and saw something you wanted, not needed, just wanted. You then pulled out your wallet and physically handed over the notes, knowing the whole time that that was all the money you had to live on until next payday, would you think differently about that purchase? You bet you would!

That’s a big part of the problem: money doesn’t feel like money anymore and people often spend far too much because it’s far too easy to forget that at the end of the day you need to pay the bill with either money you have or money you borrow.

We love stuff

It’s no longer a question of if I can afford one; it’s how many do I have?

Today it’s quite common to walk into a house full of new furniture with a television in every room. Is it any wonder the older generation roll their eyes? You see they were brought up in a generation where if you wanted something you saved for it. Now we buy things we don’t need with money we don’t have and wonder why there’s a problem with household debt levels.

Subscriptions are another issue. Most of us have a number of these, Netflix, Spotify, the list goes on. While individually the amounts seem small, added together they can amount to a hefty sum.

Please don’t think I’m saying we shouldn’t have things we want. I’m just saying that the way many people think about “stuff” is a contributing factor in increasing household debt and economic stress.

There are other factors that are contributing to this growing problem, such as the ever-increasing cost of living and low wage growth. Have you sat down lately and worked our how much you need to earn just to cover the basics like food and power, etc.?  It’s scary and if more people did this I think they would see just how little disposable income they really have.

No problem though, right? Put it on the card.  Just remember these cards have teeth and they can bite.

A perfect storm

While the government likes to talk up how good things are, the fact is, we have a problem. Remember that tsunami I mentioned earlier, this is it: very high property prices, stagnant or even retracting wage growth, high household debt and low interest rates.

I’m not saying there’s gloom and doom on the horizon, but we do have to be prepared for the eventual rise in interest rates and dip in property values. It’s important to have a good understanding of your cash flow and to only spend what you can afford to.

Don’t let that credit card that is burning a hole in your pocket turn into a real fire.

John Dickinson is the director of DebtX Mediation Services, a debt mediation company focused on helping people regain financial control through the reduction and elimination of their debts. Learn more at debtx.com.au.