This next graph just about blew my mind. Australians are annihilating their personal debt. The fall in personal credit is unprecedented and monumental.
This is not just a bit of tweaking at the margin, it’s a serious attack on personal debt in all its forms: down 16% on an annualised basis.
My favourite part of the above chart is the huge fall in the yellow bars. Australians are finally getting on top of their credit card balances.
That’s wonderful because credit cards are voracious vampires that feed on young Australians’ futures. When official interest rates dive mortgage rates follow, but credit card interest rates remain extremely elevated. Official rates may be at 0.25% but people are still paying as much as 20% interest on cards that have points and other features. Lowering the balances on those cards will make thousands of lives brighter.
The fascinating thing about credit card balances is what might be eroding them is not as simple as a tidal wave of responsibility overcoming Australia. It is, in part, lost opportunities to max them out.
Maybe you once felt the need to put new shoes on credit, or a cool new jacket. But now the nightclubs and bars are closed. Nobody’s going to see you as you stay in your tracksuit pants and watch Netflix. This new hermit-like attitude also stops you putting your card behind the bar and shouting your friends a night of cocktails.
Marketing executive Edan O’Grady, 31, finds himself in precisely this position.
“I didn’t consciously budget in any special way during lockdown,” he told me. “I just wasn’t spending the ‘walking around’ money I normally would on coffees, lunches and after-work drinks. I ended up responsibly using the excess to pay down an old credit debt.”
O’Grady’s sudden surge of frugality was not born of desire, so much as opportunity. The effect of reduced incidental spending was so large he was able to wrestle that credit card debt into submission while also splurging on his passion for music by buying a couple of synthesisers.
“Not being able to spend money on experiences definitely helped rationalise the expensive toys,” he said.
Buy now, pay later
Visa and Mastercard must find these patterns alarming. The question is this: how much is the decline of personal credit related to the rise of Afterpay?
We all know the Afterpay story by now. The simple idea of paying off a purchase in four instalments is now a company worth $21 billion. Afterpay’s share price growth has been astronomical. If you invested in Afterpay before 2019, you’re probably reading this story from the foredeck of your yacht.
But the truth is Afterpay is on a different scale to the card companies. Afterpay claims it is responsible for $11.1 billion in sales last financial year in all the markets in which it operates: Australia, US, UK, NZ. Meanwhile, $24 billion of purchases went through credit and charge cards in the month of July in Australia alone.
That makes cards around 30 times bigger than Afterpay. It is the market leader, with Zip and Humm trailing in its wake. A transition to buy now, pay later is happening, but it’s not big enough to explain the decline in credit we’ve seen.
Public debt, private surplus
So far we’ve spoken of reduced spending opportunities and buy now, pay later, but there’s a third factor eroding private debt balances: public debt.
The more money the Australian government borrows and injects into the economy, the more Australians have the opportunity to pay down their debts. JobSeeker and JobKeeper are not just keeping the tills running at Coles and Woolworths. They’re driving debt balances down.
We can see a similar repayment frenzy in housing loans. As interest rates fall, Aussies are not using the spare money to buy fun products and experiences. Instead they are slamming their home loans as hard as they can, paying off the principal and making excess payments too.
It’s worth bearing this in mind as the debate drones on and on about government debt in the months and years ahead. At least some of the increase in government debt has gone neatly into helping the private sector pay down its liabilities.
For years it was private debt that seemed terrifyingly high in Australia. This rebalancing is potentially a good thing.
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Good article. The other important contributor to people paying down their credit cards and mortgages was the release of some superannuation balances for people in hardship. While some may have spent this unwisely, the evidence suggests that many people used it to pay down personal debt which has helped increase the Savings rate in Australia to near record levels.
While it is certainly welcome news that people are reducing their credit card balances by significant amounts, we shouldn’t get carried away with the idea that this is a permanent change to their money management. “Why not”, you ask? Because the reduced level of outstanding balances is not being matched by a similar reduction in the amount of cards on issue, or the amount of outstanding credit limit available on them.
Once the pandemic looks like it is under control and spending options become available again, I’d bet my (less mortgaged) house on a quick and ferocious turnaround in credit card spending by the huddled masses.
Well done, Murphy. That article got me thinking. Something good has come out of the bucket of shit that is Covid-19. We can only hope that the debt addicted learn enough not to fall into the same trap once this pandemic is over.
Instead of being injected into circulation, the windfall money is transferring the costs of land speculators’ debt to the public purse. It would be more likely to reach the streets if their windfalls were labelled for their intended destinations. For example, if everyone of us were given a card with $1000 that could only be cashed as tickets for art, entertainment and sports, we will be more likely to support them and the money would be more likely to circulate in the bread-and-butter economy.
Probably correct, RC…but what is going on here is the current federal government is subsidising those people who they think vote for them.
IMHO those already in the house owning business are being given these payments (and super withdrawals) to prop up their already privileged lifestyle, and the former is being paid for by those taxpayers who will probably never have the opportunity to own their own home…along with all those under-privileged who have had their Jobseeker payments reduced so as to return them to poverty.
Inequality gone mad!!!!
To be fair though, this money is provided by people who actually have the privilege of paying tax.
As I said…it is the privileged who are being supported.
The rest are just disposable for this government.
It is a great pity that some workers at the bottom of the heap keep voting for right-wing lunatics who continue to ignore their existence!
Interesting that the trend line began in mid 2015, almost as if people realised that the shower they elected was incompetent and dangerous.
The descent gathered pace until early 2019 when perhaps it was so obvious that the tories were on a hiding to nothing that people suddenly became optimistic.
That optimism was shattered in May and the plunge turned precipitous until C19 appeared on the scene when it became almost vertical.