Unsustainable Debt !

It all started back in 1974 when Australian banks showered their customers with Bankcard - and set off the credit card revolution.  Before that access to money was restricted to store cards available to more affluent customers and the ever present moneylenders at pawnbroking shops who lent money in exchange for chattels.

In those days we had a lot more banks, but their numbers have now constricted to just the "big four " and Bankcard has been replaced by the international Visa and Mastercard networks.  We Australians now owe a whopping $ 50.7 billion in plastic card debt with an average interest rate of seventeen percent applied to the balance.

That is very profitable to the banks, considering that they earn somewhere about five percent on home mortgage debt secured against real estate.  Of course this is unsecured loan money and they do have some bad debt problems, but the vast majority of people are honest and eventually pay off what they owe.   The required payment on monthly balances is just two percent and that delivers a bonanza to the banks.   A customer who only pays the minimum payment each month would probably take up to twenty-two years to eliminate the debt - and pay many times the amount owing in interest.

It is a fact of life that some people are just not good at managing money !  Christmas can be a time of great danger to the uninitiated and putting the festive season " on the card " can deliver bill shock early in the new year.  With that in mind, the government coerced the banks to include a warning about how long it would take to repay the balance and what interest would accrue if only the minimum payment was made each month.   Now pressure is mounting to raise that minimum payment - to at least five percent.

What is owing on plastic credit cards is frightening.  The average debt is now $ 4350 and consequently there must be many people seriously in hock and who need to be saved from themselves.  Some may have fallen victim to offers of transferring their debt to a new credit card, interest free for a long period.  Unless they adopt a repayment regimen an even higher interest kicks in at the expiration of the grace period, and if their overspending habit continues they will quickly amass unsustainable debt.

That offer of an interest free period for transferring to a new provider is simply pure arithmetic.  The write off rate for bad debts, balanced against the return at a high interest rate on the total debt on credit cards delivers a positive profit that contributes to the billions banks earn each year.  That is also the reason that obtaining a credit card is so easy and credit limits are constantly raised.   The banks make it easy for you to owe money.

It also poses a headache for the regulators.  Any attempt to increase the monthly repayment on outstanding balances will tighten credit and send the retailers into a spin. The economy is finely balanced and still recovering from the 08 crash and interest payable on bonds and term deposits are at a historic low.  The " bricks and mortar " retailers are painfully adjusting to Internet shopping and any disruption to the money chain would have disastrous consequences.

It seems that any measure to level the playing field when it comes to credit will be slow and measured.  It is the inequalities that are now an integral part of the national economy  !