Credit cards introduce 'spending creep' into young lives

Thursday, 18 February 2021

Financial research website Moneyhub has compiled the 12 'Sacred Rules' of credit cards every cardholder should follow, if they don't want to fall victim to easy, and expensive, consumer debt.

Credit cards bring “spending creep” into the lives of many who agree to have one in their wallet, or purse.

“People love credit cards, but don’t recognise the behavioural component that accompanies their use,” says Hannah McQueen, founder of the financial fitness coaching service Enableme.

Credit cards allow people to shop online, and pay for things they haven't saved for, but McQueen says having a revolving credit facility in your hip pocket is a spending hazard for people drifting through their financial lives with no goals, or discipline.

“Our rule with clients is for your most frequent costs, use a debit card because the measure isn’t whether you can afford to pay the credit card in full each month, but whether you spent more than needed because you had a credit card,” she says.

Enableme clients pay the company to help them achieve their financial goals, which includes paying off debt, and building wealth.

Credit cards are offered to students, but youngsters who need to shop online can use Visa or Mastercard debit cards to do that.

Part of that involves bringing down people’s discretionary spending.

McQueen says overseas studies show credit cards encourage people to spend more than they would, if they were paying in cash, or from their savings.

“I can evidence at least a 20 per cent ‘easy creep’ factor to frequent spending,” she says.

It’s so easy to swipe a card, without having to confront, or see, the immediate wealth-reducing effect of doing so, she says.

Hannah McQueen, founder of the Enableme financial fitness coaching service, says many people do not recognise that having a credit card results in many people spending more than they would, if they didn't have one.

This extra spending creep wipes out the financial value of rewards points, or the interest-free period many credit cards offer, she says.

Recent research in New Zealand showed many credit card-holders who paid down debt in last year’s Covid lockdown felt entitled to respend that money to make Christmas extra special.

When a person lacks clarity over their financial lives, spending becomes easier to do, McQueen says.

Young people are now routinely offered credit cards by banks while in university, and have risen to command a place in purses and wallets over a similar timeline to student loans.

When student loans began in 1992 interest-bearing credit card debt was around $1 billion.

It ended 2019 at over $7b, but dipped to $6.5b by November as people paid down their debts during the Covid-19 pandemic.

Money Hub founder Christopher Walsh says credit card interest has not come down, despite interest rates on other forms of loan having fallen during the Covid-19 pandemic.

The lazy nature of credit card debt was exposed by the interest rates charged by the likes of banks, which have not reduced as interest rates have plunged during the pandemic, says Christopher Walsh, founder of the Moneyhub website.

Standard bank credit cards often carried interest of just under 20 per cent, so anyone carrying a $5000 debt faces paying around $1000 a year in interest.

Walsh described that as “crazy expensive,” and urged young cardholders never to make minimum repayments on credit card debt.

Online credit card calculators show how ruinous that can be. Repaying a $5000 debt incurring interest of 19.95 per cent by making 2 per cent minimum repayments each month (subject to a minimum repayment of $5) would take 57 years, at an interest cost of over $14,000.

A close look at the Reserve Bank credit card balance data shows many people do pay off their card balances at the end of the month.

At the end of October the average interest rate paid on interest-bearing credit card debt was 18.1 per cent, but it was just 10.3 per cent on all credit card debt, showing much of the debt was still within the interest-free period offered on spending.

Walsh said there were a number of other pitfalls that awaited unwary credit card users.

Annual fees: “These range from zero to sky high,” Walsh says. “It's insidious to have to pay a $60 to spend your own money.”

Late payment fees: It was important not to miss payments. Westpac, for example, charged an $8 missed payment fee.

Cash advances: Interest on cash advances (which is financial jargon for withdrawing money from ATMs) is higher than interest on ordinary purchases. The ASB Visa Light card has interest of 13.5 per cent for purchases, and 22.95 per cent for cash advances.

Foreign Exchange: The costs of making purchases in foreign currencies was high, and many people did not realise this, Walsh said.

Fraud protection: Anti-fraud agency Netsafe urges caution making online purchases using credit cards.

Walsh says people who have credit cards need to get good visibility over their personal finances, and that includes using digital tools to help them keep a helicopter view of their finances.

“The more people who can see information on their phones, that will change behaviour,” Walsh says.

That's because with credit cards, “It’s down to people to help themselves,' Walsh says.