Australians are grappling with a credit card crisis as the ever-increasing cost of living puts a strain on their finances. More than half of the population is facing financial stress, prompting many to turn to credit cards as a means to cover basic necessities such as food and utilities. However, experts are sounding the alarm, cautioning that relying on credit cards to make ends meet may result in a dangerous cycle of debt, with steep interest rates and mounting obligations. In this article, we will explore the pressing issue of credit card reliance in Australia, shedding light on the challenges it poses and the potential consequences for individuals and the economy as a whole.
Record-High Credit Card Spending
Monthly purchases on credit cards in Australia reached a record high of $33.5 billion in January, according to data from the Reserve Bank of Australia (RBA). This represents a staggering increase of 17% in the past year, with an additional $4.9 billion added to Australian credit card bills. Experts are concerned that Australians are overusing credit cards to cope with the rising cost of living. One in four Australians (27%) now say they can’t manage their finances without a credit card, compared to one in five (18%) in May 2021. The average spending on a credit card reached $3056 in December 2022, as holiday spending and inflation created the perfect storm for increased spending.
The Risk of a Debt Spiral with Credit Card Spending
The increasing prevalence of credit card usage in Australia is sounding alarm bells, as it poses a significant risk of individuals falling into a dangerous “debt spiral.” According to Amy Bradney-George, a credit card expert at Finder, outstanding balances on credit cards are on the rise, and households may quickly find themselves in a precarious situation where they are unable to repay the accumulated debt. Bradney-George warns that relying on credit cards or any form of credit to cover essential expenses carries a genuine risk, as it can result in additional interest charges and further debt. This worrisome trend is causing growing concern, as more and more households face the daunting challenge of managing their credit card debts and avoiding potential financial pitfalls.
Low Levels of Savings
The risk of falling into a debt spiral is compounded by the alarmingly low levels of savings among many Australians. Finder research reveals that nearly half of Australians admit they could only rely on their savings for a month or less in case of financial emergencies. Even more concerning, a significant 16% of workers report that their savings would last for less than a week. These findings highlight the precarious financial situation of many Australians, leaving them vulnerable to relying on credit cards or other forms of credit to cover unforeseen expenses. With such limited savings buffers, the potential for accumulating debt and facing challenges in repaying credit card balances becomes even more pronounced, underscoring the need for increased financial resilience and prudent credit card usage practices.
Steps on How to Avoid a Debt Spiral
The best way to avoid a debt spiral is to live within your means and avoid relying on credit cards to cover expenses. Here are some tips to help you manage your finances:
Make a Budget: A budget will help you keep track of your income and expenses, so you can see where your money is going. This will allow you to make better financial decisions and avoid overspending.
Reduce Your Expenses: Look for ways to reduce your expenses, such as cutting back on eating out, shopping for sales, and negotiating your bills. This will help you save money and avoid relying on credit cards to cover expenses.
Build Your Savings: Start building your savings by setting aside a portion of your income each month. This will help you build a buffer that you can use to pay off debts and avoid relying on credit cards.
Use Credit Responsibly: If you do need to use a credit card, use it responsibly. Only use it for essential expenses that you can afford to pay back, and always pay off the balance in full each month to avoid interest charges.
Seek Professional Advice: If you are struggling to manage your finances, seek professional advice from a financial advisor. They can help you develop a detailed financial plan and provide guidance on how to achieve your financial goals.
Vogue Advisory Group: Your Partner in Financial Planning
At Vogue Advisory Group, we understand the challenges of managing your finances in a time of rising costs and economic uncertainty. Our experienced financial advisors can help you develop a comprehensive financial plan that will allow you to achieve your goals while avoiding a debt spiral.
We offer a range of financial services, including investment planning, retirement planning, estate planning, and more. Our team of experts will work with you to assess your current financial situation, identify your goals, and create a customized plan that fits your unique needs and priorities.
If you’re ready to take control of your finances and secure a brighter financial future, contact us today. Our financial advisors are available to answer any questions you may have and help you get started on your journey towards financial stability.