Today’s Australian has a headline that reads, “Credit card debt slows to 13-year low.” That would lead you to believe that something good has happened in the economy. But has it?
A look at the actual numbers from the Reserve Bank yesterday tells a slightly different story. Total Australian credit card debt actually grew at 9% in February, from $39.5 billion to $43.25 billion. Interest-bearing debt grew by 9% to $31 billion. Even worse, the average interest rate Australians pay on credit card debt leapt from 17.6% to 19.4%.
Thanks to the rise in rates, credit card interest rates are 20% higher than this time last year. And it means, with current balances, Aussies are paying about $500 million in interest on stuff they already bought. Is it too late to buy into the Visa IPO?
What is so annoying about the credit card headline?
Well, it suggests that Australian credit card debt has actually declined. It hasn’t. It’s just growing less fast. This is like those ridiculous announcements that periodically emanate from the bowels of the U.S. Government about the size of the Federal deficit.
In the months that the deficit grows less fast than the month before, you see headlines like, “Deficit shrinks.” Of course it’s deliberate deception (a lie, if you like). If a tumor grows less fast it doesn’t mean it’s less dangerous. It’s still cancer (nearly all debt is malignant). And growing less fast isn’t really a qualitative improvement.
The goods news for Glenn Stevens is that high interest repayments on credit cards will eat into domestic consumption. The bad news is that the higher rates actually led to lower repayments according to the latest RBA figures. Repayments in February fell by 7.9% from $18.21 billion to $16.71 billion. That was for the month, by the way.
One chart came to mind in light of yesterday’s credit card news. It’s the climb in household interest repayments as a percentage of disposable income.
Not surprisingly, it’s on the rise. Granted, the combined number includes many older homeowners who are willing to carry higher debt loads later in life. But the simple truth is that paying interest on debt is not a good way to accumulate wealth. Never has been. Never will be. Simply not possible to get rich by spending the bank’s money.
Let’s put it this way: unless wages rise (something that would probably cause the Reserve Bank to put up rates again), Australians on the margin of the boom will have to use their credit cards to finance essential consumption, and they will pay dearly to do so. Either that, or they will have to reduce consumption. “If we do not discipline ourselves,” the old saying goes, “life will do it for us.”
Markets and Money