Beware of the Christmas spending hangover

The New Year could bring a significant rise in the number of Kiwis facing debt stress, warns credit reporting and debt collection agency Dun & Bradstreet.

Many consumers could get black marks on their credit reports if they don't effectively manage the financial pressures of the festive season, says D&B.

New research released today reveals that the annual Christmas credit splurge has traditionally resulted in a near 94 per cent increase in debt referrals in February as consumers find themselves unable to pay back the money spent over the holiday period.

However, this figure could be even higher in 2010 due to the pressure that the global credit crisis has placed on families over the past 12-24 months.

D&B is urging consumers to keep a close eye on their spending over the Christmas break so they can avoid the pain of high interest charges or damage to their credit report in the New Year.

This warning coincides with additional D&B research which reveals that the many Kiwis don't truly understand what information is included on their credit report and how it is used by credit providers to assess a credit application.

Research shows that it is often only after consumers have had a credit application denied that they order a copy of their credit report and subsequently repay their defaults. Thirty eight per cent of defaults are paid following the denial of a credit application.

Negative events, such as defaults, are listed on a credit report. A default stays on an individual's report for five years and can severely limit a consumer's ability to access credit in the future.

In addition, credit applications (but not whether they are accepted) are recorded and this means that too many enquiries, even when just shopping around for the best deal, can look like a consumer is taking on large amounts of debt.

A potential lender may decide to reject a new application because of a high level of application activity or because of a previous late payment that has been listed on an individual's report.

A further warning sign to consumers to manage their finances and credit facilities over the holiday period comes from D&B research which shows that those who apply for bank credit in February are twice as likely to default on their obligation in just four months than applications made at any other time of year.

This finding clearly demonstrates that using credit to cover the shortfall when all other options for payment have been exhausted will likely cause further financial pain and result in a black mark on an individual's credit report.

The research also reveals that consumers who resort to taking on more credit as a means of paying their Christmas bills are also likely to wind up defaulting on other forms of credit, with this group 14 per cent more likely to default on non-bank credit such as a phone account.

Dun & Bradstreet warns that the pain caused by recent economic events could make the start of 2010 more painful than the previous year as some households are already facing a degree of financial stress.

The latest bankruptcy figures show that 2,521 individuals filed for bankruptcy in the 2008/09 financial year. In addition, 2,831 No Asset Procedures and 257 Instalment Orders were filed. All of these figures are up on the previous year.

On top of this, the Reserve Bank has indicated that a continuation of the economic recovery could result in the removal of monetary stimulus next year, which means that New Zealanders who plan to fund their Christmas festivities on credit could be forced to pay higher rates of interest in the New Year.

According to D&B (NZ) general manager John Scott it is a sobering prospect for those families that are facing Christmas with a lower disposable income than last year.

"Our research provides an alarming reminder to consumers that Christmas spending must be watched closely to avoid the New Year blues," said Scott.

"Each year we see too many consumers spend beyond their means over the holidays, only to result in unnecessary costs and pain the following year.

"Despite the fact that New Zealand appears to be on the road to economic recovery, this Christmas could be particularly worrisome. Some households are facing financial difficulties as a result of the credit crisis and because they may be facing Christmas with less money than last year we could see an increase in unaffordable credit related spending.

COMMON CREDIT MYTHS

* Low value or non-bank debt is less important than big ticket items such as a home mortgage:
Many consumers believe that failure to pay small debts and credit facilities with non-bank lenders won't have an impact on their credit report. As a result, consumers tend to be very diligent about their home mortgage but pay little attention to their mobile phone bill or gas account. In reality, the size of the debt and its source is irrelevant - negative payment behaviours will be listed on your credit report and should therefore be given equal attention.

* Checking your credit report will negatively impact future credit applications:
Checking your credit file does not have a detrimental impact on credit applications. In fact to the contrary, consumers should check their credit report regularly to ensure its accuracy. You can access a copy of your credit report through a credit reporting bureau such as Dun & Bradstreet (D&B). The bureau also provides a dispute mechanism should you disagree with any of the information included in your report. Checking your file regularly is a good way to ensure its accuracy and avoid the pain of identity theft.

* Closing old accounts will improve your ability to access future credit:
In New Zealand a credit report contains a listing of credit applications but it does not show whether the applications has been approved. This means closing a credit facility will have no impact on your credit file. However, if you are having difficulty resisting the temptation to use the credit, or if the facility is costing you money you should close the account. Although this won't impact your credit report it will be a significant step towards better credit management.

* Credit applications are approved or denied based on a credit rating:
New Zealand consumers are not given a credit score or rating as occurs in the United States. Credit providers base their lending decisions on the information contained in a consumer credit report. This means diligent management of all credit facilities is critically important. Mismanagement of just one facility can have a detrimental impact on your ability to access affordable credit when you need it.

There is no single quick fix to perk up your credit report, says D&B. Instead you need to take a holistic approach to managing your financial health: pay your bills on time, reduce your debts and make sure your credit report is accurate.