Key Points:

As governments around the world scramble to rescue economies awash with debt, the global finance crisis has concentrated people's attention on their personal liquidity.

"It throws it in your face," Retirement Commissioner Diana Crossan says of the international credit market meltdown, and gives people who haven't really been affected by it yet an opportunity to check that their spending is under control.

And experts are warning New Zealanders to get on top of their personal indebtedness to survive the recession.

Westpac chief economist Brendan O'Donovan says we are yet to see the impact of recession on consumer and credit card defaults.

"For many years we have spent far more than we earn and borrowed the difference from offshore.

"This was always going to be unsustainable in the long run. A correction of some sort was long overdue."

The good news is that the fall in house prices and an increasingly cautious attitude toward risk have already encouraged less demand for borrowing in New Zealand, and more saving, says O'Donovan.

Consumer credit applications are at their lowest point in four years, data from credit information provider Veda Advantage shows.

But while overall applications for credit including personal loans, hire purchases and home loans are at their lowest since 2004, the number of defaults has almost doubled in that time - signalling growing stress among New Zealand consumers.

There was a 24 per cent increase in consumer defaults overall this September compared with September last year, and a 32 per cent increase in the number of telco bill defaults.

The highest area of growth in default payments is credit cards. Defaults on credit cards grew by 23 per cent in 2007 and 28 per cent to the end of June this year.

Defaults on personal loans have increased 4 per cent for the period January to June this year.

Veda Advantage New Zealand director John Roberts says: "We are witnessing increasing numbers of people turning to the revolving lines of credit offered by credit cards as a means of staving off other debts.

"Default volumes overall are up 18 per cent on last year, and the big increase in defaults for the month of







September is perhaps a harbinger of what's to come."

When people start to struggle with their obligations, Crossan says they do things that get them further in debt - such as getting another credit card to pay off the credit card they already have - instead of fronting up to the lender and discussing options.

Roberts estimates that 70 per cent of credit card users pay off only the minimum required balance each month. He recommends they apply to their bank for a debt consolidation loan instead and cut up their cards.

This will attract a lower interest rate and force them into a monthly payment regime over a fixed term - as well as constraining them from taking on more debt.

The amount of extra credit people have taken on in the past few years shows New Zealanders' low financial literacy, Roberts says, as does the number of people who put their funds in very high-risk finance companies.

"If you looked at the interest rates they were offering relative to the banks, the margin simply was not worth the risk".

Another example of New Zealanders' inattention to their personal liquidity before the credit crisis is that "the bulk of New Zealanders aren't even aware of the fact that we hold a credit file on them," Roberts says.

Most people only become aware that there is a file with their negative credit history on it when a loan application they have made gets turned down for this reason.

People should actively manage their credit files - they can get a free copy from credit reporting agencies Dun & Bradstreet or Veda Advantage.

Yet Roberts gets only about 1500 credit inquiries from people wanting to check their file each year - while Veda holds files on 2.8 million people.

New Zealand is one of only three OECD countries that operates a negative credit reporting system, rather than a comprehensive reporting one.

Under this system a credit report contains a person's identity details, a list of past credit applications and records of negative events such as defaults and bankruptcies.

New Zealand does not operate a credit rating system - just one default listing means you have an adverse credit record.

Organisations such as large consumer credit providers have various ways of assessing credit risk.

But more than anything else, what influences a lender's decision is adverse data on a person's credit file - a civil court judgement, a bankruptcy or no asset procedure, or other credit defaults they may have had.

They will also note how many viewings there have been on the credit file over the past 18 months as an indicator of likely creditworthiness.

Your age, length of time with your employer, whether you rent or own your home, how long you have lived at your address and whether you own your car are considered indicators of stability as well.

Credit providers even judge the suburb where you live as relevant to people's likelihood of defaulting on a payment.

Veda models where the highest numbers of defaults are coming from on a "geo-risk" map.

But people shouldn't leave it to credit providers to rate their financial liquidity, Crossan says. Take a close look at your financial situation by doing a detailed budget. Identify areas where you can make savings through lifestyle changes and redirect them to paying off debt faster.

And don't panic about debt, Crossan says - take the time to make informed decisions.

During volatile times, people often discover how well they can cope with financial risk.

It's never too late to start preparing for the long term, says Crossan - and with any saving, a small amount over a long period of time pays off in the end, so don't put it off because things have become tight.

MARKET MADNESS: WHAT DO I DO?

Don't panic - make considered, informed decisions.

Look closely at your finances - budget all income and spending.

See if you can reduce spending to pay debt.

If you can't meet your commitments, talk to your bank as soon as possible.

Don't miss any payments to avoid getting a bad credit rating. You can't remove a default listing from your credit file by paying off debt.

Give all your bills the same attention. The size and source of the debt is irrelevant - all defaults will be listed on your credit file.

Check your credit file regularly to ensure details are accurate and not being used by a fraudster.

If you are having trouble paying your credit card bill, stop using it.

Don't get a new credit card to pay off the bill on your current card. If you can't afford the repayments, try re-financing your debt into a lower interest loan.

Remember shares or a fund that includes shares are best suited for long-term investing and will be affected by market fluctuations.

Don't be put off saving, especially for the long term. By saving regularly and earning interest on your savings, even the smallest amounts can grow substantially.

THE STATE OF BORROWING
Mortgage applications:
* Down 17 per cent for January to September on same period last year.
* Mortgage applications are now at their lowest level for six years.

Hire purchase applications
* 17.5 per cent decrease for this year's third quarter compared to same period last year.
* 15 per cent decrease from this year's second quarter to third quarter.

Credit card applications:
* 10.5 per cent increase this year compared with last year.

Consumer defaults:
* 18 per cent year-to-date increase on last year.
* 24 per cent increase this September compared with September last year.
* 32 per cent increase in number of telco bill defaults.