Are credit cards really that bad, and do they have a place in today’s society? Since October 2011 the official cash rate has fallen from 4.75% to 2%, this has been a boon for the average Aussie who now has extra cash to spend. But, have we used this extra income wisely, I am not convinced.
Lower interest rates have been a win for Australian households, 25% of us now own our own home outright compared to a measly 16% in 2007. That’s one victory for the average homeowner! With record low interest rates, shouldn’t we also see less credit card debt? Unfortunately not.
In fact, banks have made over $2 billion by not passing on RBA’s rate cuts, that’s $281 per customer. Did you know through NAB you would pay about 14.75% in interest on a credit card! That’s $6,742 in interest on a $5,000 credit card. There’s a reason Aussie’s love to hate the big banks.
In Australia credit card debt stands at $51 billion and $33 billion of that is accruing interest! I can only think of all the things I could do with $33 billion.
It would be superstitious to say credit cards are evil, they fulfil a role in the economy and are a great option when cash simply isn’t on hand. The issue arises when the balance of the card isn’t paid in full each month.
Did you know, more than half of Australia’s credit card debt is held by those on lower incomes? Debt as a percentage of income is much higher for poorer Australians, and this affects them more than those on a high income.
It’s also generational, Gen X are the least likely to pay off their balances at the end of each month. Half of Gen X cardholders make up to three unplanned credit card purchases a month, a lot of this being spent on children.
Credit card debt is a silent killer, it has the ability to creep up on the unsuspecting. This isn’t to say credit cards should be chopped up and you only use cash. In fact, it may actually be smart to buy things on credit, provided money exists to actually pay this off, given the rewards many credit cards offer.
How is it so many Australians are stuck paying such exorbitant rates? In a materialistic society such as ours and the need to buy “things” rises, so too will credit card debt. The urge to keep up with a societal expectation of the standard of living, does push many Australians into financial hardship.
The figures suggest credit card debt is a serious issue that does need to be confronted. According to Wesley Mission, a third of all NSW households are currently living beyond their means. The banks have used it as a fall back to make money in the face of record low mortgage rates, and have achieved a $2 billion windfall since 2011.
Are credit cards really that bad? When not used properly, they can be one of the worst financial decisions many Australian’s will make in their lifetime.
A student at the University of Queensland, James is currently studying a degree of Commerce and Economics, majoring in Finance and Business and Industry. With a particular interest in the macroeconomic environment and international affairs, James seeks to use his knowledge of the financial industry and economics to provide practical advice on how to make everyday finances work.