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THE MYTH OF THE CREDIT CARD DEBT CRISIS

By Steven Münchenberg, Chief Executive, Australian Bankers’ Association  27 March, 2013: 

It wasn’t so long ago that we would regularly hear tales of Australians groaning under an ever growing mountain of credit card debt.  So much so, that in the run up to the last election, the Prime Minister felt the need to announce a suite of new laws on credit cards, because people were “being weighed under by credit card debt”.¹

In fact, well before the Prime Minister’s announcement, there’d been a fundamental change in the nature of credit card use and debt in Australia.  It’s fair to say that for a number of years, both the average amount outstanding on credit cards (the average debt) and the average limit on credit cards, had been growing strongly.  Ten years ago, the average debt per card and the average credit limit were growing at over 10% per annum.  Growth rates eased off between 2004 and 2007, with the average debt per card growing between 6 – 8% per annum. Slower growth, but still well above the growth in household incomes.

Then, during the global financial crisis (GFC), growth in the average credit card debt slowed significantly and it has not rebounded to its pre-GFC levels. In fact, since mid-2010, the rate of growth in the average debt per card has progressively fallen.  A similar pattern of falling growth rates has been seen for the average credit card limit. In fact, today, the average debt per card of $3,198 is the lowest in three years and has fallen by two percent over the past year.  The average credit limit, of $9,136 has also fallen since mid-2012.   

But probably the best indicator of how we’re managing our credit card debt is the percentage of debt on the average card compared to the maximum possible debt, the card limit (i.e. credit used as a proportion of credit available). Today, this sits at 35%.  In other words, on average we are using about 35% of the credit available on our cards. This is the lowest usage since 2001.

There are a number of likely reasons for this change.  Clearly a big driver was the GFC, with the growth in average credit card debt hitting a brick wall in late 2008 and early 2009, during the worst months of the crisis.  In other words, while people kept using their cards, overall they also kept up their repayments so that their average debt did not grow. 

But the downward trend in the growth of the average debt extends back to early 2007, well before the GFC began to unfold.  This is possibly a sign that customers were already changing their spending behaviour even before the crisis hit.

Another factor could be changes in the way people have been paying for goods and services – choosing to use EFTPOS, cash or direct payments into accounts with Internet banking by phone, tablet or other computer.  This could help explain the more recent change, which has seen the average level of debt fall for the first time.  But if people are changing the way they pay, it’s not because they are building up other forms of debt.  We know that when interest rates are falling, most people with mortgages now prefer to maintain higher levels of repayment, to shorten the length of their mortgage, rather than reduce their repayment levels.  They’re certainly not drawing down on the equity in their homes to fund spending, instead of putting purchases on the credit card.

To the extent that credit cards can be substituted for other forms of payment, the main choice is direct debit, such as EFTPOS.  But the important difference here is that customers are spending money already in the bank, not purchasing on credit.

Regardless of the reasons, the shift has been pronounced and consistent for a number of years now.  While there are always Australians who struggle to stay ahead, and we might all be happier if we owed a bit less on our credit cards, there’s no evidence that we’re being ground down by a mountain of credit card debt.  In fact, overall Australians have managed their credit cards sensibly and responsibly.