Credit card defaults on the rise along with job losses
September 17 2013
By : Vidya Ranganathan
A growing number of Australians are failing to pay their credit card bills, in a potential warning sign more households are struggling with their finances as the economy weakens.
Figures from credit reporting agency Veda show the number of customers defaulting on their credit cards has increased steadily throughout the year, rising by 15 per cent in the year to August.
‘’It really is the canary in the coalmine if you cannot pay your credit card’’
The company, which holds some 16 million consumer credit files, says there has been a year-on-year rise in defaults in almost every month since January, the trend worsening in the last few months and spiking at 29 per cent in July. A default occurs when a bill of more than $100 is not paid within two months.
Banks and other businesses that extend credit to households, such as utilities, are also calling in the debt collectors more frequently. Debt collection agency Dun & Bradstreet said the number of consumer debts referred to it rose almost 5 per cent in the June quarter, on top of growth of more than 15 per cent in the March quarter. Failure to pay a credit card debt is often the first sign consumers are struggling with expenses and the trend could be a result of rising unemployment, which is at a four-year high of 5.8 per cent.
However, it is at odds with a falling number of people defaulting on their home loans, which are a much larger source of household debt. The principal solicitor at the Consumer Credit Legal Centre, Katherine Lane, said she had seen an increase in the number of people seeking financial help after losing their job.
''It's not as bad as pre-GFC but you can tell that things are not going as well as they were,'' she said.
Ms Lane said credit card debt was the first type of loan people tended to default on and it often pointed to further financial problems down the track, including further defaults.
''It really is the canary in the coalmine if you cannot pay your credit card,'' she said.
She advised people who were struggling with credit cards to organise a repayment plan with their bank. While home loan interest rates have fallen sharply this year, credit card interest rates barely budged.
The Reserve Bank noted the trend in its latest check-up on the financial system, saying the ratio of soured personal loans, at 2.1 per cent, was more than double the rate from before the global financial crisis. The central bank did not appear overly concerned, saying personal loans were less than 5 per cent of banks' total loans and home loan default rates were moving in the other direction. But it also said an ''underlying deterioration in credit quality'' could not be ruled out. Last month the Commonwealth Bank played down a rise in the number of people falling behind on personal loans as ''seasonal''