NZ credit card debt hit an all time high of just under $6 billion in December.
Click the graph image below to link to an interactive version.
We’re constantly being told about how important it is for us to get out of debt. Our government is obsessed with telling us how busy they are getting out of debt (despite the massive increase in offshore borrowing since 2008). Yet we keep doing the opposite, taking on more and more debt, through homeloans, student debt, credit card debt or, for some of us, through second and third tier lenders.
Credit card debt is particularly onerous because of the high rates of interest charged, commonly just below 20% (the end-of-moth simple average standard card interest rate for December 2013 was 19.6%). Yet credit card debt is currently only a fraction of what banks would like to be charging us – according to RBNZ data total NZ credit limits were $19,769 million, meaning only a credit utilisation ratio of 0.3.
So how hard is it to get out of credit card debt? Since banks set their minimum payments only just higher than their interest rates, it can take a very long time to get out of debt. For example a $2000 debt with an ANZ Mastercard Standard at an interest rate of 19.95% paid off at the minimum rate will take 724 months, or 60.3 years to pay off. Over those 60.3 years you will pay $10,910, meaning the bank will make almost $9000 in interest charges off you in that period. See the excellent ‘Credit Card Calculator’ at Interest.co.nz for more details on this.
This is absolutely outlandish, and it is no surprise that people are literally starving to pay off their debt.
And, the problem is actually getting worse. As well as having record amounts in debt, NZ banks are riding high on the interest rates they are charging on credit cards. As the graph below demonstrates, credit card interest rates are always much higher than mortgage rates. However, from the GFC in mid-2008 mortgage rates dropped quite dramatically from over 10% to around 6%, and have hovered around there ever since. Credit card rates also dropped, although not as far – from around 20% to around 18%. And they didn’t stay at 18% for long – by June 2011 they were up to 19.4%.
Banks will defend these rates by saying that lending on credit cards is riskier because they don’t have a house as collateral as in a mortgage.
However it is also much more profitable. And NZ banks seem quite comfortable with that fact.