Credit Card Spree Racks Up Record $16.5b Debt

Sydney Morning Herald

Friday July 21, 2006

Matt Wade Economics Writer

THE nation has indulged in a record credit card spending binge, racking up $16.5 billion on cards in a single month including more than $1 billion in cash advances.

The May splurge surpassed the previous monthly high of $16.2 billion, registered during the Christmas spree last December, and pushed the collective credit card bill to a record of $36 billion. Total outstanding credit card debt has doubled in less than five years.

About 115 million card transactions were made in the month, a total only surpassed in the previous three Decembers.

More than 3.5 million cash advances totalling $1.13 billion were withdrawn on credit cards in May, Reserve Bank figures show.

The number of cash advances was 18.6 per cent higher than a year earlier - the strongest growth in seven years - and the average cash advance was $323 in May.

Because cash advances are an expensive form of borrowing, they can be a sign of growing financial stress in households.

"The fact that a record number of people took out expensive cash advances on their credit cards in May is a worrying development," said a CommSec economist, Craig James.

But MWE Consulting credit card industry analyst, Mike Ebstein, said the recent trend for cardholders shifting outstanding balances to new, low interest rate cards had contributed to the blow-out in cash advances. These transfers are counted as a cash advance, he said. "I don't think it's a sign of distressed lending."

Even so, cardholders have racked up more than $12 billion in cash advances in the past year.

Analysts were surprised by the increase in credit card activity in May, which came despite an interest rate increase by the Reserve Bank that month.

Mr James said the figures suggested more cardholders were electing not to pay off their outstanding card balance in full, thus accruing interest charges.

"The hike in mortgage repayments in May would have left many cash-strapped, causing them to leave more outstanding debt on their credit cards," he said.

Mr Ebstein said high petrol prices might also have contributed to the growth in credit card spending in May.

Figures released by Visa this week showed consumers spent 22 per cent more on Visa cards at petrol stations in the March quarter, although they cut back on spending at department and discount stores.

Australians spent $940 million at service stations using their Visa cards in the March quarter, up from $769 million in the same period in 2005.

The number of credit cards on issue ballooned by almost 1 million in the past year to 12.96 million by the end of May.

The average credit card balance rose to $2771 in May, up from $2745 in April and 7.6 per cent higher than a year ago.

Mr James said the average credit card balance accruing interest was up 10 per cent compared with a year ago and was growing at the fastest annual growth rate in two years.

Cardholders used on average 37 per cent of their available credit in May, a proportion that has been trending higher over the past seven months.

Notwithstanding record levels of credit card debt, bad debt ratios are relatively low, Mr James said.