Unprecedented amount of credit card debt repaid as Kiwis tighten their belts

Wednesday, 13 May 2020

Households have been reducing credit card at a faster rate than at any time since they became widely available.

New Zealanders repaid an unprecedented amount of their credit card debt in March as panic set in over the economic impact of Covid-19.

The month saw a 5.4 per cent drop in total amount owed by credit cardholders to banks and other credit card issuers.

That equated to the better part of $300 million of credit card debt repaid, figures from the Reserve Bank showed, and economists expect that to be just the start of a mass wave of debt reduction by households able to make extra repayments.

The reduction was more than five times the size of the reduction in credit card debt in the immediate aftermath of the global financial crisis.

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Westpac senior economist Satish Ranchhod expects households to reign in spending for the rest of the year, even if their incomes remain unchanged.

'We expect that spending on credit cards would have fallen dramatically throughout April,' said Westpac senior economist Satish Ranchhod.

The bank did not track or forecast credit card balances, but April saw a 50 per cent decline in card payments, he said.

He expected households reducing their spending in a bid to increase their savings and repay debt to be a drag on the economic recovery as New Zealand moves onto level 2 tomorrow and many shops and businesses open their doors for the first time since March 25.

'Households will be a lot more nervous about spending for the remainder of the year,' Ranchhod said.

'That's going to be a pretty big drag,' he said.

The Roy Morgan Consumer Confidence Index fell in March to its lowest point since the global financial crisis.

March ended with Kiwi households and businesses owing a combined $6.9 billion on their cards, Reserve Bank figures showed, compared with $7.2b at the end of February.

The last time less than $7b was owed on cards was October 2017.

In the 12 months to the end of September 2009, when unemployment was rising rapidly, credit card debt owed only reduced by 0.9 per cent compared to the amount owed a year earlier.

Unemployment was on the rise at the time towards 6.5 per cent.

Forecasts suggest unemployment could rise to double digits as a result of the hit delivered by the world's fight against Covid-19, with some industries like tourism having been hit particularly hard.