Consumers struggle to manage credit commitment

MEDIA RELEASE 1 Wednesday, 20 July 2011

Consumers struggle to manage credit commitment

One in three Kiwis anticipate using credit for household expenses during the September quarter

Almost a third of Kiwis anticipate difficulties in meeting their credit obligations in the next three months. Concerns about credit management have negatively impacted spending habits of Kiwis in the September quarter of 2011, with only two in ten people intending to make a major purchase. This is compared with nearly one in three people during the September quarter last year.

The number of people expecting to use their credit card for purchases they couldn’t otherwise afford fell to 32 percent in the September quarter of 2011, four percentage points down from the corresponding quarter last year.

These findings are taken from the latest Dun & Bradstreet Consumer Credit Expectations Survey* released today. The survey was conducted by TNS Global in June and examines peoples’ expectations for credit usage, credit history and spending in the September quarter of 2011. Other key findings from the survey include:

17 percent of people expect higher household debt levels, down two percentage points from the June quarter of 2011. Only five percent of respondents intend to apply for a new credit card in the next three months, a stark contrast from 27 percent in the June quarter of 2011. 29 percent of people expect to encounter difficulties in meeting their credit commitments. 40 percent of people anticipate that a rise in interest rates will have a negative impact on their finances. 27 percent expect to hold off making a major purchase in September quarter 2011, up five percent points since the June quarter expectations. 32 percent of people expect to use a credit card for otherwise unaffordable expenses.

The survey also indicates that 34 percent of people would rather use their credit card for major purchases, rather than take out a personal loan or access money from their mortgage. Despite credit cards being the second most preferred payment method of choice, almost as many people- 29 percent- expect to face difficulties in meeting their credit obligations.

Paying for major purchases in next three months0%10%20%30%40%50%60%70%80%90%SavingsCredit cardInterest-free dealMortgagePersonal loanMethods of payment The groups demonstrating the highest level of financial stress are predominantly low income earners, unemployed individuals and Christchurch residents. These demographics not only intend to avoid spending big in the coming three months, but also intend to delay any major purchases. They are also more likely to have difficulties paying off their credit cards. Overall, the survey reveals the cautious spending habits of Kiwis in the post-Global Financial Crisis period, with the overwhelming majority (77 percent) likely to fund a purchase from their own savings.

Location Forty-six percent of those living in Christchurch will delay making a major purchase in the next three months, a figure significantly higher than the national average of 27 percent. Only 15 percent of Christchurch residents would put otherwise unaffordable purchases on their credit card, with all residents indicating they would not apply for new credit nor a credit limit increase in the next three months. Dun & Bradstreet General Manager John Scott believes that Christchurch households are facing some of the highest financial pressure in the nation, with the number of people expecting difficulties in meeting credit commitments jumping nine percentage points from the June quarter 2011, to 23 percent in the September quarter. “The recent spate of earthquakes in the area and uncertain economic expectations stemming from this has severely curbed appetite for credit as well as placed a strain on consumers in meeting their credit obligations,” Mr Scott said.

“If you look at business to business trade payments, usually a good indicator of the financial health of the nation’s businesses, on-time payments have dropped more than 13 percent during the past year. Depressed consumer spending in turn influences business revenue- this is a vicious cycle.”

In Wellington, 21 percent of people anticipate a higher level of household debt, as compared to the national average of 17 percent. Nearly half of Wellington residents expect interest rate rises to negatively impact household finances. However, a significant proportion (45 percent) of people in this area will still use their credit card to pay for otherwise unaffordable expenses.

Age The age groups experiencing the most financial stress have been largely unchanged since the June quarter of 2011, with those aged 40 to 54 indicating the most difficulties in meeting their credit commitments.

Thirty-two percent of those aged 70 and over are also the most likely to expect higher household debts- this has trended upward for the past two years with a significant proportion of 50+ individuals anticipating higher debt levels.

However, younger demographics (18 to 34 years) are also in greater risk of financial stress, with over half of respondents aged 18 to 19 years expecting to use credit to pay for otherwise unaffordable items. Forty-five percent of 20 to 24 year olds also fall into this category.

These figures have remained the same since the previous quarter, when nearly half of those aged 18 to 34 years expected to use their credit card for otherwise unaffordable items. Younger people are also the most likely to make big-ticket purchases and apply for new credit in the September quarter.

The fact that age groups across the board are in risk of financial distress is a sign that households are not being wise with their money, according to John Scott. “Both young and old demographics are struggling to meet credit commitments, yet over half of them continue to spend on credit. While this is good for the economy in the short term, increased repayments combined with high household debts will hurt their finances in the long run,” said Mr Scott.

Income Low income earners exhibit the most potential for financial distress, with 35 percent of those earning below $30,000 per annum expecting to use credit to pay for items they couldn’t afford with cash. Thirty-nine percent of these earners also struggle to meet credit commitments, with this figure rising to 41 percent for those on salaries of $30,000 to $40,000 per year. Not surprisingly, Kiwis finding it the least difficult to meet credit obligations are those earning above $100,000 annually. Level of difficulty in meeting credit commitments0%10%20%30%40%50%60%70%80%90%<$30k$30-$40k$40-$50k$50-$70k$70k-$100k>$100kIncomeDifficultNot difficult A potential rise in interest rates is also expected to negatively impact people across all income levels, with those in higher income brackets (above $50,000 per year) to be the hardest hit. More than half of the respondents with salaries exceeding $100,000 annually expect their finances to be adversely impacted by rising interest rates.

“This negative sentiment is consistent with the Reserve Bank’s decision not to raise the cash rate until the economy has stabilised. At the moment, household expenditure is weak and debt is high, both key signs that the economy has not fully recovered from the recent natural disasters,” Mr Scott said.

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