Credit Card Debt: Is it worth it? Deep Dive into

Much like Europe, Australia is currently enduring a difficult economic period of high inflation and high interest rates. Whilst there may have been similarly high rates throughout the 1990s, house prices are much higher today in real terms, meaning that mortgage repayments have never been so expensive.

Wages are currently growing at a much lower rate than inflation, meaning purchasing power is on the decline. Credit card usage was already on the rise during Covid-19, but the cost of living crisis has further perpetuated that, with credit card spending hitting $390 billion in April.

This article will dive into the impact that high interest rates are having, the current state of credit card usage in Australia, and potential strategies for consumers and businesses alike.

The weight of interest rate hikes

Interest rate hikes are designed to cool off the economy and temper inflation. It is working to a degree, but the reason why it’s working isn’t to be celebrated. Generally, high interest may make economic actors more likely to save than to spend. This has been the case, with retail trade volume rising rapidly since the pandemic, but has slowed down and eventually contracted in recent months.

But, retail trading volume is still high, and it’s now being funded by credit card usage. Of course, the higher cash rate is reflected in credit card APR, because it is now more expensive for credit cards to access what was previously nearly-free money. And, the reward for lending to consumers – who are now at higher risk due to a struggling economy – needs to be higher given that Australian yields are over 4%. 

Commonwealth government debt is on the rise too. Over $60m a day is made in interest payments alone, sparking projections that payments will go from 0.9% of GDP to 1.7% in the next decade.

This is in part because rates around the world have risen, meaning new debt and bonds are now more expensive. Interest as an expenditure is one of the fastest growing costs for small businesses, particularly hitting highly geared companies the most.

The current state of credit card debt in Australia

Use of credit cards in Australia is currently up around 20% in 2023, showing that households are quickly turning to credit to fund their consumption – or bills. 

The biggest culprit of the cost of living crisis is the increase in mortgage repayments. With a median house price of over $1.3m in Sydney, a rise from 1.5% interest to 5.90% means that the monthly repayments on an $800,000 25-year mortgage has gone from $3,209 to $5,116. This is around a $2,000 increase, amounting to a roughly 60% rise in most people’s largest expense.

The average credit card balance has gone from a steady $306b-$333b in the past three years, to an eye-watering $394bn in 2023. And, when more homes need to be remortgaged later in the year, this may get worse.

RBA reported that in May, almost half of the $40bn credit card debt was accruing interest. Meanwhile, Finder discovered that in a survey they completed, 16% of respondents were either unable to make repayments or over their limit. 

Strategies for individuals

Good knowledge over how to effectively manage your debt can drastically improve one’s ability to stay on top of things. Two people with identical levels of income and debt may go about repaying them differently, and it could lead to one being successful and one ending up in a debt trap.

Prioritise

First and foremost, it’s crucial to prioritize your debts. Most people have more than one type of debt, perhaps multiple cards, a mortgage, and car finance. It’s always important to pay at least the minimum amount due on each, but extra repayments should generally be focused on the higher APR debt. But, if you have one that is almost paid off, it may be worth clearing it even if it’s a low APR debt, just to free up even more funds for repayments elsewhere. So, you might decide to focus on one debt at a time, creating a snowball effect of repayments.

Save more by paying more

In order to target one debt at a time, you need to avoid paying just the minimum amount due. Instead, every dollar above the minimum will chip away at the total repayments, providing there are no fees and penalties involved in this (there shouldn’t be on credit cards, but there might be on some loans).

Balance transfers

You do not want to abuse balance transfers, as each time you apply for a new one it will appear on your credit report. However, performing a balance transfer can help take advantage of promotions, such as a 0% credit card interest rate for the first year. In fact, you can consolidate your debt this way too, which may be helpful.

Pay on time

Never miss a repayment, particularly when it’s voluntary. In other words, do not overpay on one debt by using the money you needed for the minimum repayment on another. This will incur higher interest or late fees, and even punish your credit score. A bad credit score will cost you in the long run, as your next debt or credit card may have worse terms.

Strategies for sole traders and small businesses

84% of Australian SMEs have credit cards, 23% of which are looking to reduce the amount of credit cards they have. Here are a few ways in which small businesses can better manage credit card debt.

Revise spending

Scrutinizing your business expenses can be a direct way to reduce reliance on credit cards. To do this, categorize your spending and identify areas that can be reduced. Not only will this reduce future credit card spending, but the money saved can help repay current debt.

Choosing a good card and consolidate

For businesses with various high-interest debts, consolidation can help. This may mean taking out a lower APR loan (or a different credit card) and using it to pay off higher interest balances. This doesn’t just help reduce repayments, but it simplifies it too. It’s also important to know which business card to use exactly, depending on your purpose, creditworthiness, and debt situation. A business credit card can have many advantages too, such as expense tracking.

Revert to cash

Relying on credit cards for payments can lead to errors and fiscal mismanagement. Going back to the basics of using cash can better limit your spending, and it will certainly alleviate interest and fees incurred from the spending.

Security

Businesses often have assets, be it kitchen equipment, cars, or computers. Putting forward collateral for a loan can help attain a lower APR. Whilst this involves risks that are important to consider, the security can be isolated from personal assets in a limited company. Furthermore, this can further cheapen your consolidation and move away from credit card usage.

Conclusion

Credit card usage in Australia 2023 is on the rise. The government, businesses, and consumers are all facing higher levels of debt and more challenging repayments. Policy is a matter for the government and central bank, so for now, it’s important for individuals to focus on themselves and know how to pay off credit card debt effectively.

By being more involved with your accounts, cash flow, and debt management, it’s possible to employ strategies to reduce the total amount of interest you will pay. In times when money is expensive, credit score becomes all the more important to attain preferential rates, so make sure to take steps in improving creditworthiness too. 

Additional Resources

• MoneySmart –  Hub of resources for money and debt management
• National Debt Helpline – 1800 007 007 
• Small Business Debt Helpline – 1800 413 823