Credit card spend-up sends our debt soaring

By CHRIS DANIELS and BRIDGET CARTER

New Zealanders are shoring up their finances with credit cards at an ever-increasing rate, a trend which has prompted warnings for consumers and the banks.

Outstanding advances on the cards - debt not repaid within the allowable interest-free period - have risen by 56 per cent in the past three years, and are expected to top $3 billion soon.

This change in spending has been caused by several factors, one being the willingness of supermarkets, once reluctant to pay the merchant fees, to now freely accept credit cards.

Another is the huge popularity of card loyalty schemes, which offer free air travel, cash rebates, vouchers and other incentives.

The makeup of household debt is also changing. Personal loans have become less popular and hire purchase deals show little growth as customers turn increasingly to their plastic cards.

The latest credit card data has come from Baycorp Business Intelligence, which processes credit checks from the banks.

"The evidence shows that the household sector is increasingly using credit cards as a financing vehicle," said its report.

Monthly credit inquiries by the card sector had risen 70 per cent in the past three years.

Baycorp communications director Paul Stewart said that while debt levels were much higher on credit cards, the amount of bad debt was still relatively low.

But total outstanding credit card debt was still growing well in excess of household incomes and must eventually be repaid.

Banks and the credit card companies should perhaps start looking closely at the level of risk they were carrying on the cards they had issued, said Mr Stewart.

A sign that the banks might not be entirely comfortable with the way customers are using credit cards was seen this year in the popular Global Plus card issued by the BNZ.

Many BNZ card holders were paying off the debt within the 55 days interest-free period, meaning they were still earning air points, but paying the bank no interest.

So in March the bank cut the number of interest-free days from 55 to 44, and changed the rules to make internet and telebanking bill payments ineligible for air points.

While our rising debt reflects the fact that it is now much easier to raise a loan, changing attitudes also play a role.

Otago University research shows that a growing number of New Zealanders can be categorised as "young pleasure-seekers" who live for today, like to consume and are more likely than others to make only the minimum credit-card repayments and write cheques they cannot cover.

A professor of finance and banking at Massey University, Chris Moore, said he was not alarmed by the big rise in credit card use.

Using a credit card properly could be the most sensible way to spend money. "If you pay it off each month, then clearly it's the way to go," he said.

Professor Moore, too, thought that the supermarkets' acceptance of cards was a big factor in the recent increases.

But Porirua Budget Service coordinator Missy McLean said the downside of credit cards was always present.

At least two people owing about $2000 on credit cards came to the service each week.

Missy McLean said credit cards encouraged people to spend more and gave them a false sense of what they could afford.

Credit was supposed to be just for emergencies, she said, but people used it for everyday spending.

A revolving credit card system could reduce interest and bank fees, but it would sting you if you were not good at budgeting. "You have to be really tough on yourself."

Consumers Institute chief executive David Russell takes a more benign view of the rising popularity of credit cards, especially when they are used properly.

The attitude of New Zealanders to credit cards had changed dramatically in the past few years.

"People do seem to be using credit cards responsibly, paying them off at the end of the month. You can see that the banks are a little bit worried about that.

"There is such a thing as a free lunch if you use it properly. I think a lot of people are using credit cards to their advantage."

Mr Russell said that he would be concerned if banks were pushing people into long-term credit card debt.

He advised people to refuse unsolicited approaches by banks seeking to increase credit card spending limits.