Honey Trap: Kiwis rack up $6.2 billion in credit card debt

Credit card debt is burdening a lot of Kiwis. Photo / Getty Images

Credit card debt has topped $6.2 billion nationally and local budget advisers say spending has started to spike again - with the cost-of-living increases in the wake of Covid.

It comes as tertiary students are being urged by financial advisers to be wary of card offers that could potentially trap them in debt for life.

Figures from the Reserve Bank of NZ show total advances outstanding rose 0.2 per cent in March compared to February.

Commission for Financial Capability Personal Finance Lead Tom Hartmann. Photo / Supplied

Tom Hartman, lead for the Commission for Financial Capability Personal Finance, said some people found it extremely hard to rein in their credit card spending.

''It's all pleasure in the short term, but later on, obviously, those balances get high and it starts to get painful. It's like boiling a frog - little by little the temperature keeps rising so the balance keeps rising, and the interest keeps increasing to the point where it gets quite uncomfortable.''

''We end up taking on more than we can handle and ... it can spiral out of control.''

The CFC barometer survey shows 30 per cent of people did not pay off their credit card balance every month.

Interest rates also remained stubbornly high because it was a competitive, commercial environment, he said.

Some rates could be more than 25 per cent in New Zealand while in the United States seven per cent was considered high, he said.

It was no surprise banks were offering credit cards to students, he said.

''If they start to manage their finances on their credit cards, evidence shows that they will do that for decades to come. They're setting up future revenue streams.''

Hartmann recommended using a debit card and have a $1000 emergency fund.

Tauranga Budget Advisory Service manager Shirley McCombe. Photo / Supplied

Tauranga Budget Advisory Service manager Shirley McCombe said credit card debt was low during lockdown but has since climbed. Figures show in August 2020 its clients had amassed $128,669 of debt, which spiralled to $715,992 last month.

Data also revealed the total debt of clients climbed from $36.9 million to $45.6m over the same timeframes.

''My concern was always that families would bridge the gap with credit cards, but to know the true impact we would need accurate before and after figures. Scary stuff, particularly if something changes like the loss of a job, the end of a contract, the birth of a child or illness.''

''High interest makes pulling yourself out of debt very difficult for low-income earners.''

Financial Service director Alison McKenzie. Photo / File

McKenzie Finance director Alison McKenzie said people who were disciplined and diligent may find a credit card would work in their favour.

Unfortunately for others, it was a trap, which could ''get them in a hole that is really, really hard to get out of''.

''When you look at what the banks make off people who have credit card debt, it's an awful lot.''

NZME reporter David Beck said during the last 10 years he has spent blindly and he still borrowed money off his parents.

The 30-year-old consequently racked up about $7000 in credit card debt.

He accepts that now means he can't afford to go on trips or buy a house.

However, he has taken the bull by its horns and was finally tackling his debt and not ignoring it.

He has consolidated his credit cards into one loan and finally feels free.

''It's amazing how much better I feel. My debt is still overwhelming but I have a plan which will see me credit card debt-free in three years.''

Kiwibank Head of Cards, Fiona Ehn, said a credit card was a great tool for managing cashflow and having access to funds when needed.

Kiwibank's minimum monthly payment was set at five per cent, which meant customers needed to pay at least that on the closing balance each month.

''All credit card applications at Kiwibank are assessed to ensure the applicant has sufficient income after expenses to support the credit facility. This includes students.''

The bank was always looking at ways it could work with customers to get them back on track with their finances if they were having challenges meeting payments, she said.

Credit card debt can cause people a lot of headaches. Photo / Getty Images

An ANZ spokesman said it also encouraged anyone who was experiencing difficulty in meeting their payments to contact them as early as possible.

''This will help us to work with them to understand how we can help to manage their situation and find a solution that will help.''

On its website, ANZ had a section on credit card education which included topics like 'Know your Limit - Does your credit card limit match your budget?' and 'Cash advances and why you should avoid them'.

The Centrix April Market Insights Report shows credit card applications were up four per cent on March but cards that were in arrears had dropped to five per cent in March, compared to 5.8 per cent in March 2020.

Information was gathered from banks, finance companies, telco and utilities to compile the report.

Nationally 11,900 accounts were in hardship - a 10 per cent increase in the last month.

The hardship insights show 68 per cent of cases were related to mortgage and credit card accounts.

Centrix chief commercial officer Monika Lacey said many consumers had done the right thing by paying down debt while they had surplus cash ''which is great to see''.

If consumers are having difficulty meeting their obligations they should have a conversation with their provider – they were here to help.

''We also encourage consumers to get a copy of their own credit reports so they can see what is on their credit file. This is a free service.''

Commerce minister David Clark has also announced plans to cap the interchange fee - a charge that makes up a large part of merchant fees - as part of a new law that will be overseen by the Commerce Commission.

It would hit banks in the pocket and could result in a watering down of credit card loyalty programmes which offer benefits like cash back, airpoints or other points which can be used for shopping.

It's better to get your debt under control sooner rather than later. Photo / Getty Images

Tackle your debts

* Check how much debt you have, and what sort it is. The high-interest debt costing you the most is the priority. It's the high-interest debt that hurts most: payday loans, credit cards, store cards, car loans.

* Knocking off the debt that costs you most is the quickest and cheapest way out of debt.

* Wrapping all your debts together and paying them off at once – ideally at a lower interest rate so you get out faster – can be helpful. But it can take longer to be rid of it.

* Rolling many debts into one single loan with a lower interest rate can often save you money but the danger is freeing up space on cards and using them again. - Source Get Sorted