Personal debt rate dropping swiftly
HOUSEHOLDS have put the brakes on consumer debt such as credit cards and personal loans despite mortgage lending continuing to rise.
Reserve Bank of Australia figures show that overall personal debt is shrinking at its fastest rate in five years, down 1.1 per cent in 12 months.
A decade ago Australians’ personal debt was growing at 14 per cent annually, according to the RBA data, and economists expect consumers will stay in their low-spending shells for a while yet as they worry about mortgages and other bills.
Fresh figures last week showed the average credit card balance fell to $3069, its lowest level since December 2007.
CommSec senior economist Ryan Felsman said slow wages growth and rising cost of living pressures such as energy bills were prompting people to be conservative about their personal debt, even though home loan lending was at record highs. “Usage of credit card limits stood at just 33.7 per cent in August, around the lowest level in almost 19 years,” Mr Felsman said.
“Clearly consumers are becoming more cautious in terms of their overall expenditure,” he said. “They have learned from the GFC and are paying down debt at a rapid rate.”
BetaShares chief economist David Bassanese said a trend towards more savvy borrowing was pushing down personal credit.
“One of the reasons it’s slowing is that the interest rates charged on credit cards are hugely expensive,” he said.
“People are becoming smarter and not having a balance on their credit cards — there’s a trend towards using lower cost borrowing like home equity loans.”
People who borrow against the equity in their homes often pay less than 5 per cent interest, versus almost 20 per cent on credit cards.
For a $10,000 personal debt that’s an interest saving of $1500 a year.
However, it was not a good idea to take money from your mortgage to pay for a holiday, Mr Bassanese said.
He said the outlook for personal debt and consumer spending was likely to remain soft, despite an “explosion” of smaller lenders in recent times offering easy access to credit.
“I wouldn’t like to see that trend develop — it’s a worry if people need to borrow money for two weeks to pay for their food.”