Financial stress drives huge rise in credit card applications

Applications for credit cards have risen significantly over the past year even as demand for other types of credit has fallen, as consumers look for a way to cope with constantly rising prices.

Figures released exclusively to this masthead by major credit bureau Equifax show that applications for mortgages fell 16 per cent, car loan applications fell 14 per cent and applications for personal loans fell almost 5 per cent during the final quarter of last year, compared to the same quarter a year earlier.

Hannah and Marcus, both aged 23, are feeling the financial pinch and have to be very careful with their money.Credit:Nick Moir

Over the same period, applications for credit cards rose by more than 21 per cent, a move which could further affect the number of home loans issued as lenders often assess credit reports when home buyers apply for finance.

The latest NAB Economic Consumer Sentiment Survey shows the cost of living stress continued to climb in the fourth quarter of last year, to a 4.5-year high. Consumers identified groceries, utilities, transport, mortgage and travel and holidays as the cost rises they have noticed the most.

Canstar figures show the 0.25 percentage point increase in cash rate by the Reserve Bank of Australia on Tuesday will mean an additional $2000 in monthly repayments on a 30-year $1 million mortgage since rates started to rise in May last year. Almost $1000 a month will be added to repayments on a $500,000 mortgage with 30 years to run.

With rates likely to rise at least once more before the end of the year, more home owners could be forced to consider solutions such as credit cards.

However, Melanie Cochrane, the managing director of Equifax, says the reason for the high number of credit applications is not solely because of the cost of living crunch, attributing it to pent-up demand as more people use credit cards to pay for travel.

“But clearly, when we are in the current economic environment, it’s not surprising that consumers are turning to credit cards to help keep up with the cost of living,” she says.

Arrears on credit cards as recorded by Equifax remain stable – for now. However, arrears data for spending in November and December will not come through until March or April.

Cochrane says it is likely some of those who have turned to credit cards to help with the costs of living will struggle with repayments. Those who fail to pay off their credit card debt, in full, by the due date, pay interest that is close to 20 per cent a year, on average.

Hannah Thompson, a psychiatric emergency nurse, and partner Marcus Valastro, an engineer, say while they are feeling the pinch because of rising prices and rising interest rates, they are not tempted to apply for a credit card.

They opt instead to use debit cards and only spend what they have, as it helps them to better manage their money.

The couple wanted to buy a property in Sydney, but instead bought a house and land package on the Central Coast, where prices are lower. Despite living there for a while, they now rent out that property, and rent in Sydney, as the commute proved to be too much.

Half of their mortgage is fixed at less than 2 per cent with the term ending in 12 months, after which they will be paying a much higher variable interest rate. The other half of their mortgage is variable.

“We have to be very careful with our money, with interest rates rising and the rising cost-of-living in general,” Thompson says.

Sally Tindall, the research director at RateCity, says while the credit card can help plug a hole in the budget at the end of the month, it is a quick fix that can easily unravel when the bills start rolling in.

“They could be clutching at straws because if they don’t clear the balance in full before the next bill comes in, they’ll be paying interest on top, making a bad situation worse,” she says.

Those who struggle to pay off their credit card by the due date should consider moving it to a lower-rate card. “It’s often hard to see any other way through the month, but there are options out there if you can’t pay the bills, other than reaching for the plastic,” she says.

“Switching to cheaper brands at the supermarket, renegotiating your regular bills, selling things you don’t need around the house – these all may all seem trivial, but together the savings can really add up.”

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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