Kiwis are spending more on their credit cards to keep up with the rising cost of living, prompting a warning from a financial expert who says it won’t be sustainable in the long term.
The outstanding balance on personal credit card debt has risen from $5.495 billion in May 2022 to $5.63b in May this year, Reserve Bank (RBNZ) figures show.
Credit card spending fell during the pandemic as people paid down their debt as they couldn’t spend money as easily during lockdown periods.
But since September outstanding balances have risen each month for the same comparable month the year before.
Personal finance lead at Sorted, Tom Hartmann, said Kiwis appear to be using credit debt to handle cost of living pressures, based on data from credit bureau Centrix.
Centrix showed credit payments rose to 426,000 in June, up 15,000 month on month with a sharp increase in the number of unsecured loans falling into arrears last month.
The Centrix data also showed an increase in buy now, pay later (BNPL) arrears in March and May this year.
But Hartmann warned that people will only be able to handle higher mortgage repayments for so long.
“It’s definitely reflecting cost of living pressures, whether that’s at the grocery store, at the petrol pump, but particularly in terms of mortgage cost, that we’re turning to borrowing other ways to make ends meet,” he said.
Hartmann said that while this may work for households in the short term, personal debt will become harder to manage over time if credit card spending continues.
“For now, people are making choices in a way that will help them get their household and their families through this. This is not sustainable because people will only be able to borrow so much on credit cards but it may be the right outcome in the short term,” Hartmann said.
He said interest rates will come down to stimulate activity eventually but it is hard to say how long before this starts to bite more households.
However, when the RBNZ does lower official interest rates, Hartmann said it will become “easier to pay down debt”.
“But in the meantime, repayment gets slower, so it’s a slower recovery for people as they take on this debt,” he said.
Hartmann said households are “borrowing at pretty expensive rates to get through”, and can manage credit card spending by limiting their spending on interest by using low-interest rate cards.
“If you are getting by on a credit card, you want it to be the lowest-interest credit card on the market.
“You want to find any extra money you can and prioritise paying down debt because the longer it lingers, the more expensive it gets,” he said.
The New Zealand Herald is running a series taking a closer look at the nation’s debt levels, which have hit a new record high of $790 billion - up from $739b last year.
Overall consumer debt is up 3.7 per cent to $13.76b in May, up from $13.35b in May 22. Consumer debt has fallen from $14.5b in May 2021.
Reserve Bank figures showed total personal consumer debt dropped from $14.5b in May 2021 to $13.8b in May this year but is up from $13.4b last year.
This May, bank debt contributed to $7.5b of consumer debt and loans from non-bank lenders came to $6.3b, up from $7.3b and $6b last year respectively.
Westpac senior economist Satish Ranchhod said that while consumer debt levels appear to be flat, there has been an uptick in alternative consumer lenders, particularly across buy now pay later (BNPL) schemes which was not included in RBNZ data.
“Consumer lending growth has picked up a bit over the last year,” Ranchhod said.
“It’s still relatively low and credit card spending had risen over the last couple of years as the economy has come out of the pandemic. But just over the last six months or so, it’s really flattened off.”
Ranchhod said the trend was more complex than it appeared as more household budgets become increasingly stretched by cost of living pressures and necessities like food.
“Households are having to splash out more cash to meet their day-to-day expenses. Even with that, they are still spending.”
Cost of living pressures could be a reason households were borrowing more on consumer loans as more households face increasing interest rates, he said.
Ranchhod said the economy was “still in pretty good shape”, with high employment and firm demand; however, “it’s clear that that pressure on household finances is continuing to mount”.
He said New Zealand is seeing “modest growth” compared to before the pandemic when growth rates would have been closer to five per cent.
“I think we do need to be careful just about exactly where that growth is because people are still spending,” Ranchhod said.
This month, Ranchhod stated in Westpac’s household finances update that household spending on debt servicing is rising; Stats NZ shows, on average, households are spending 7.5 per cent of their disposable income on interest payments each quarter, up from 5 per cent at the end of 2021.
“That’s still relatively low compared to prior to the pandemic when interest costs accounted for around 10 per cent of household spending,” Ranchhod said.
He said the full impact of interest rate hikes is also likely to hit households later this year as most households have fixed mortgage rates.
“Over the coming year around 50 per cent of all mortgages will come up for repricing and will expose increasing numbers of borrowers to higher rates,” Ranchhod said.
Nation of debt
Monday: How much more do Kiwis owe?
Wednesday: Kiwis are putting more on the plastic to cope with the cost of living
Alka Prasad is an Auckland-based business reporter covering small business and retail.