Personal finance: Debt? We're soaking in it

By MARK FRYER

What are the defining kiwi icons? Jandals? Buzzy bees? Barbecues and beaches?

More like the mortgage, the credit card and the overdraft, because if there's one thing New Zealanders have learned to love in recent years, it's debt.

From being a nation of relative scrooges 15 years ago, we now have debt levels on a par with other Western nations.

Whether that prompts an outbreak of tut-tutting or a shrug depends on your point of view; rising debt could be seen as just another example of New Zealand catching up with the rest of the world.

But while it's hard to get through life without borrowing money, the fact remains that debt is expensive, even at today's apparently low interest rates.

Too much debt can make it impossible to amass any savings and leaves victims on a treadmill - having to earn enough to pay interest on the debts they accumulated to buy things they couldn't afford because they were paying too much interest ...

The impact is more than individual. Our increasing predilection for debt may have helped the economy in the past, but economists frequently cite today's high debt levels as reducing the potential for growth.

Statistics are slippery things. It would be easy to get alarmed about the increasing billions we owe, while ignoring the fact that prices and incomes have also risen.

But even after taking inflation into account, debt levels have risen sharply.

Take a look at the graph on the right. It shows how total "household" debt - non-business debt, that is - compares with our total disposable income - after-tax income, including any benefits.

Until the mid-1980s debts were just over 50 per cent of our income. This means we could have paid off all our credit cards, hire purchase, mortgages and other assorted debts with six or seven months of income.

But now, paying off all our debts would take more than 120 per cent of our incomes - about 15 months' worth.

Those figures exaggerate our lack of thrift because perhaps 10 to 20 per cent of that "household" debt is actually money borrowed by small businesses, which now find it easier and cheaper to use mortgage finance rather than business loans.

But even taking that into account, something changed dramatically in the mid-1980s.

The abrupt switch from thrift to extravagance is not hard to understand.

From 1984, deregulation meant banks and other institutions had more money to lend, ending the effective rationing of debt that prevailed until then.

Freed from borrowing controls, we took to debt with a vengeance, encouraged by inflation - especially rapidly rising house prices - which made diving into debt seem a thoroughly rational financial strategy.

Today our debt levels are no longer rising as fast as they did in those heady times.

In the 12 months to February, household debt rose 6 per cent, compared with about 15 per cent annually in the mid-1990s.

The debt-to-income ratio also levelled off last year.

But there's no sign of any switch to repaying debt. Baycorp, the company that checks your credit-worthiness when you apply for a loan, says it has seen a significant rise in inquiries from lenders over the past few months.

Banking inquiries were 3.1 per cent higher this March than in 2000, credit card inquiries were up 4.5 per cent and inquiries from motor vehicle financiers rose 41 per cent.

Mounting debt would not matter much if it was accompanied by a rise in wealth. After all, who cares about a bigger mortgage when the value of your house is soaring?

But that hasn't been the case lately.

Last year, households' net worth - what we own minus what we owe - fell by about $5 billion, says WestpacTrust's latest survey of household saving.

Some of that was caused by a fall in the value of our assets, such as housing, but what really did the damage was a rise in our debts, by about $4 billion over the year.

As WestpacTrust notes, household wealth is a key influence on confidence and spending. Falling household wealth does not point to a robust economy in future.

While our rising debt reflects the fact that it's much easier to get a loan now, 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 can't cover.

"They seem to be quite happy living with debt," says senior lecturer Dr Sarah Todd, one of the authors of the study of consumer behaviour.

"They can see no reason for delaying purchases or saving for things. They're quite happy to just go out and buy things now."

But young trend-chasers aren't the only ones who have trouble coping with debt.

Raewyn Nielsen, executive officer of the Federation of Family Budgeting Services, which offers free budget advice, says the vast majority of people the service sees are having trouble with the basics - mortgage and rent arrears, for example - rather than credit cards and hire purchase debts.

Budget woes tend to be more intractable today, she says.

"When I was first budget-advising 14 years ago, we could take a person's situation and do a bit of juggling and come up with something that would solve the problem. Today we can't."

Instead of re-working the numbers, the service increasingly has to advise people on making lifestyle changes to get out of debt, whether it's moving to cheaper housing, taking in a boarder or selling the car.

And, she says, for many people the only realistic alternative is bankruptcy or, in some cases, seeking a Summary Instalment Order, a court-administered process that allows debts of under $12,000 to be repaid in stages without threat of legal action.

* To contact the Family Budgeting Service, look under "Budget Advice Services" in the white pages of your telephone directory.

FIVE STEPS TO GETTING OUT OF DEBT - AND STAYING THAT WAY

Stop spending more than your income

Simple as that. Or not, depending on your financial situation and your willpower, or lack thereof.

But there are no magic answers; the only way to cut debt is to spend less than you earn. In order to work out how much you can spend, the next step may be in order.

Make a budget

Boring but useful. Unless you know how much your debt is costing, it's hard to set targets for getting rid of it.

A budget need not be elaborate; just tot up your spending - including the interest payments on those debts - and your income.

In the case of credit card debt, remember that the amount you're spending every month isn't the minimum payment required, it's the interest on what you owe, which is much more than the minimum.

If your budget reveals some spare money that can be put towards debt reduction, start planning to do just that.

If not, you're going to have to find ways to cut your spending.

Automate your banking

Get your pay deposited into your bank account and set up automatic payments to cover regular bills.

Once you have worked out how much you can devote to debt reduction, get those payments made automatically too, rather than rely on paying what you have left over.

Consider consolidating

If you have several loans - mortgage, credit card, hire purchase - it makes sense to pay off the loan with the highest interest rate first.

Or you can save money by consolidating - rolling them all into one loan at the lowest possible rate.

If you already have a mortgage, the cheapest option will probably be to increase it to repay higher-interest debts.

If you don't, you may be able to put all your debts on a low-interest credit card or a personal loan.

But consolidating is not a magic wand; having rolled all your debts into one, you still have to pay off that debt.

Be careful about putting short-term debts on your mortgage. Transferring a hire purchase debt at 20 per cent to an 8 per cent mortgage makes sense, but not if you then take 20 years to pay off the mortgage.

Avoid temptation

If you can't resist temptation, you can at least avoid it. Get rid of all your credit cards and store cards and stick to cash, cheques and eftpos.

If you want a card for emergencies, use a debit card that must be paid off monthly.

Beware of "pay no interest now" deals - when you work out the real cost they can be a very expensive way to buy.

* Contact Personal Finance Editor Mark Fryer at:
Business Herald, PO Box 32, Auckland

Phone: (09) 373-6400 ext 8833

Fax: (09) 373-6423

E-mail: mark_fryer@nzherald.co.nz