Danger signs as reliance on credit cards grows

Brokers say their use can affect ability to secure a home loan

Danger signs as reliance on credit cards grows



Australians are either holding onto credit cards to meet their financial commitments or being forced to get rid of them to get a home loan, according to Sydney-based mortgage brokers.

RBA data showed total credit card debt rose for the fifth month in a row in February. Analysis from comparison site RateCity said people could be “cracking under pressure” and “turning to plastic to make ends meet”.

The total credit card bill attracting interest charges increased by $270 million to $17.75 billion on Australia’s personal credit cards, RateCity said, which was the highest level since August 2021.

Yellow Brick Road’s Earlwood branch principal and broker Effie Nicol (pictured above left) said overall she was still seeing large numbers of customers who were holding multiple credit cards with high limits.

“They may only owe a small amount on these cards – for example, a $2,000 debt on a $30,000-limit card – but they are holding onto the high limits in case they need the money for an emergency.”

This is at the same time as Nicol has seen customer spending habits change over the last year as interest rates rose, with people now more reluctant to use credit to spend on non-essentials.

Australian Financial and Mortgage Solutions’ Andrew Hadjidemetri (pictured above right), based in Sydney CBD, said that his business was only seeing slight increases in credit card debt over the last year.

However he has noticed borrowers are taking longer to pay down their outstanding credit card debt.

“A lot of our clients who used to repay their debt down to the minimum within a 30-day period are now repaying these down closer to the 55-day period,” Hadjidemetri  said.

Credit cards crucial in loan serviceability equation

Nicol and Hadjidemetri both said credit cards were impacting loan serviceability success.

“Credit card debt is definitely impacting serviceability, particularly because of the rising interest rates,” Nicol said.

Customers had to reduce their high credit card limits or close them altogether to be able to borrow the required amount to achieve their property goals, according to Nicol.

Hadjidemetri likewise said closing a credit card could be required to get the client into their first home or investment.

“Banks assess clients on their current credit card limit and not on their balance,” he said.

“If you have a $20,000 limit and have $0 owing, you are as negatively affected as a borrower who owes $20,000. For every $10,000 limit, your borrowing reduces by approximately $50,000.”

Hadjidemetri said the conclusion on credit cards was that “if you don’t need them, close them”.

“We’ve seen the positive effect this has on the majority of our clients monthly savings and borrowings. On average, clients are saving 5% to 10% more each more once they close their cards.”

Nicol suggested that mortgage and finance channel loan customers needed to budget more effectively so they only spend what they can realistically afford.

“Whether it’s using a credit card to earn reward points or buy now pay later, they still need to pay back debt in a timely manner so they don’t occur more unnecessary interest charges.”

Love affair with credit cards a concern

RateCity research director Sally Tindall said families’ budgets had been “pummelled from multiple fronts over the last few months as the cost of just about everything goes through the roof”.

“While the credit card can be a bridge to get through to the next pay day, it’s a band-aid solution that can quickly come unstuck,” Tindall said. “The credit card might seem like the only option to get through the month, but there are other solutions to combat the rising cost of living.”

Tindall recommended a range of solutions, including switching to a personal loan, where borrowers had to pay it back in regular chunks, therefore avoiding the temptation to rack up more debt.

“Shopping around for supermarket specials, renegotiating your energy and other bills, and taking up any concessions and rebates you may be eligible for can all add up to big savings,” she said.

“If you are up to your eyeballs in credit card debt, pull the pin.”

Digital Finance Analytics founder and principal, Martin North, recently said there was not enough attention paid to the rise in consumer debt in Australia, caused by people who have exhausted their savings after tapping into credit cards, buy now pay later or other credit forms.

“I see this as a big issue and I do not see enough focus on the total credit exposure of households,” North said. “Those in stress are most likely to grab other credit forms. This will take time to play out, but it is worth watching. Credit scores and reporting are slow to adapt to this.”

Are you seeing credit card spending and access trending up or down among your client base and why?  Share your thoughts or stories on this topic in the comments section below.

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