Sorry, No Credit

The Age

Thursday December 11, 2008

Annie Lawson

Could you give your credit cards a holiday this Christmas? Annie Lawson reports.

MANY of us would be financially (and emotionally) marooned without our trusty bits of plastic tucked safely in our wallets. A decade of prosperity has nurtured a nation of reckless shoppers. We use credit cards to buy anything from plasma televisions to takeaway pizzas, birthday presents or a much-needed hit of caffeine in the morning before the economy started to get erratic.

That Australians owe nearly $45billion on credit cards, a five-fold increase over the past decade, suggests that unrestrained buying became a popular national pastime in the pre-meltdown days.

Despite global economic ructions, many people continue to splurge. Comfort buying is a common yet irrational response in times of financial stress, bolstering sales of cosmetics, confectionary and alcohol sales, says Jeff Rogut, executive director of the Australian Centre for Retail Studies at Monash University.

"If people can't buy the big things they want, they buy small luxuries," he says. "For generations Y and X, this is the first recessionary-type environment they have experienced so it may take some time for them to adjust to the realisation that their debt has to be paid back."

Rogut believes our parents' spending behaviour shapes our own attitudes to moneyand that changing entrenched spending habits can be difficult. Failing to associate credit cards with actual money explains why shopaholics keep buying despite their growing debt.

"If people spend cash, they are more controlled on how much they spend," he says. "A credit card is virtual cash, you don't see the bank balance, but with cash, there is a finite amount to spend."

So far, people are not financially stretched to the point where they are forced to use plastic to cover essential items such as household bills, groceries and the mortgage, according to payments consultant Mike Ebstein. "Credit card users are being more disciplined with their debt but are continuing to use their cards," he says. "The rate of growth on credit card use is unchanged but the rate of growth of credit card balances started to come down seven months ago.

"If credit cards were being used as lending of last resort, when you are desperate, then you would see a jump in cash advances and we are seeing the opposite."

Spending only what we can afford requires planning, discipline and forfeiting the instant gratification that comes from spontaneous buying.

Given the pressure to rethink our spending patterns, Metro challenged two people to a give their credit card a week off.

Both considered themselves moderate users, yet found it impossible to use only cash or debit card for a week.

Ebstein says plastic isn't bad if used responsibly - it accrues rewards points and gives a run-down of expenses. But carefree shoppers should consider switching to a debit card to

avoid exorbitant credit card interest.

"Debit cards give you control because you are only using your own money," he says. "In times of economic uncertainty, people want greater control."

MARCUS SHARP , 35, uses his credit card twice a week, mainly for show tickets, clothes, birthday presents and twice-weekly games of squash. He has two Visa cards with a $9000 limit.

After racking up a 3000 credit card bill in 2003 when he moved to London for a four-year working stint, the secondary school French teacher vowed he would never again be stung by the high interest payments.

"It's money down the drain," he says. "When I use my card, I always pay it off immediately so I avoid the interest."

He assumed that a week without plastic would be a breeze - until he gave it a go.

Two days into the challenge he buckled, using his card to buy two tickets to a production of Woyzeck at the Malthouse. In his defence, Sharp says: "You can't use an (Eftpos) debit card when you buy tickets online so credit was my only option."

Throughout the week, he used cash for his regular morning coffee and dining out. He resisted the urge to use his card when he and his wife did their weekly food shopping in Balaclava. A bagel and coffee for lunch and a film that evening were also paid for with cash.

But he tripped up when he spotted a polo shirt and some

pot plants in Chapel Street, Prahran. It's difficult to plan ahead for spontaneous purchases, Sharp says, adding that credit

is more convenient if you are buying clothes or homewares on a whim.

DOMINIQUE JEREMIAH, 42, considers herself financially prudent. She uses credit cards several times a week to pay for clothes, food, alcohol, physio, gardening products and household bills.

When she met her husband five years ago, he had accumulated a $5000 Myer Card debt, in addition to several thousand dollars on the credit card.

She encouraged him to reduce the balance to zero and the Langwarrin couple each month diligently pay their debt on their Visa card, which has a $25,000 limit, to avoid interest payments.

"We are lucky because we both have good incomes and my husband's daughters are grown up so there are no maintenance payments," she says.

"I get paid monthly and I get most of my bills automatically paid so I know what's left - which isn't much."

Jeremiah splurged on some "big-ticket items" two months ago, using plastic to buy a $3500 bike and spend more than $2000 on kayaks.

"We are very into our sports - I'm in a cycling club and I always joke with my husband that at least he doesn't have to worry about his wife spending money on fashion," she says. "In fact, that might be cheaper."

Despite being debt-averse, Jeremiah says she struggled to last a week without her credit card. She used it on the last day of the challenge when booking accommodation for a cycling event in Shepparton. The online booking system accepted only credit cards as payment.

She was also tempted during the weekly grocery shopping, observing that using cash or Eftpos made her more cautious about how much she spent.

"I would stop and think before I made a purchase and check that I did not make too many cash withdrawals from my credit union account, as they charge after eight transactions," she says.

"Not spending on my credit card makes you much more aware of what you buy and whether you spend more than you earn."

PLASTIC PEOPLE

My week without a credit card:

MARCUS SHARP,

35, secondary school teacher, Elwood.

Monday, December 1

Coffee, $3.20 (cash)

Dry-cleaning, $15 (cash)

Tuesday, December 2

Coffee, $3.20 (cash)

Weekly train ticket, $28 (cash)

Two tickets to Woyzeck at the Malthouse Theatre, $83 (credit card)

Wednesday, December 3

Coffee, $3.20 (cash)

Fruit, $12 (cash)

Thursday, December 4

Coffee, $3.20 (cash)

Beer, $6 (cash)

Fruit and vegetables, $15 (cash)

Friday, December 5

Coffee, $3.20 (cash)

Meal in East Ivanhoe with friends, $20 (cash)

Beer, $30 (cash)

Saturday, December 6

Bagel and coffee, $12 (cash)

Coffee and mineral water, $5 (cash)

Shirt, $51 (credit card)

Pot plant plates, $35 (credit card)

Film, $13 (cash)

Dinner and drinks, $30 (cash)

Sunday, December 7

Weekly grocery shop, including cereal, milk and tomatoes, $60 (cash)

Nachos and beer, $20 (cash)

Total: $451

Credit: $169

Cash: $282

DOMINIQUE JEREMIAH,

42, IT specialist, Langwarrin

Monday, December 1

Boot camp, $50 (internet banking transfer from savings account)

Tuesday, December 2

Physio, $60 (debit card)

Thursday, December 4

Newspaper, $1.10 (cash)

South East Water bill, $111 (internet banking transfer from savings account)

Friday, December 5

Hairdresser, $180 (debit card):

Ice pack for leg, $16 (debit card)

Underwear and clothes for nephew, $110 (debit card)

Christmas gifts from David Jones, $60 (debit card)

Groceries, $150, including fruit, fish and sun lotion (debit card)

Saturday, December 6

Coffees, $16 (cash)

Groceries, $12 (debit card)

Sunday, December 7

Coffee and lunch, $27 (debit card)

Caravan park payment for weekend in Shepparton, $30 (Visa card)

Total: $823

Credit: $30

Cash/debit card: $793

The average credit and charge card balance stood at $3092 for the year ended September. This compares with $2954 in 2007, $2758 in 2006 and $2271 five years ago.

There are more than 13 million credit card and 1.2 million charge card accounts in Australia, with different repayment terms, reward programs and fee structures.

Australians accumulated $44.6billion in credit card debt by September, a five-fold increase over 10 years. This compares to $41.2billion in 2007 and $9.5billion in 1998.

Household debt is more than 1.5 times disposable income.

On average, 14.4percent of income goes to servicing debt, mainly mortgage repayments. Credit card interest payments chew up less 0.5 per cent of income.

The annual growth rate in credit card balances fell from 12.9per cent last year to 9.4per cent this year.

The rate of growth in credit card spending has gone up 10.1per cent in the year to September compared to 8.8per cent in the same period last year.

There has been a drift towards debit cards in recent years - they accounted for 33.6per cent of card purchases (credit and charge cards accounted for 66.4per cent) in the year to September 2008, compared to 32.3per cent a year earlier and 30.0 per cent five years ago.

Australians spent $18.4billion in shops in September, a 2.3per cent increase on last year and the slowest annual growth since mid-2005.

Source: Reserve Bank of Australia, payments consultant Mike Ebstein

© 2008 The Age

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