Credit card interest has fallen to the lowest level in nearly two decades after Australians paid off a ‘‘mammoth’’ $1.1 billion of debt in a single month.
As households settled into lockdowns in New South Wales and Victoria during July, they locked away their credit cards and began paying down their debts.
That saw credit card spending plummet 11.4 per cent to $19.5 billion in July, according to Reserve Bank data published on Tuesday afternoon.
Interest owed fell 5.5 per cent to $18.9 billion, the lowest amount since February 2004.
Welcome news for households
It is a welcome turnaround for households, which have copped increasing credit card interest since Australia emerged from lockdowns last July.
BIS Oxford senior economist Sean Langcake said lockdowns offered limited opportunities to spend on credit cards and had prompted many people to prioritise paying down debts amid growing economic uncertainty.
“There are services you can’t consume,” he told The New Daily.
“You can’t travel, you can’t go to the movies or many other recreational services.
“Without those options, you’re using your credit card less, but it’s also a time to pay it down.”
The number of card purchases fell by 15 million in July (6.17 per cent).
RateCity research director Sally Tindall said the $1.1 billion in repaid credit card debt during July was a “mammoth effort” regardless of the effects of lockdown.
“At the beginning of COVID, Australians wiped nearly $7 billion off the total debt accruing interest in just six months,” she said on Tuesday.
“This time around it looks like the lockdowns are having a similar effect.”
Interest was $2.57 billion lower in July than the year before, showing the impact of lockdown and broader trends away from credit cards.
Credit card accounts plummet
Australians have been cutting up their credit cards in favour of low-cost options like buy now, pay later (BNPL), driving down account numbers.
A whopping 670,000 people have ditched their cards over the past year, which equates to about one in 20 credit cards exiting the market.
About 44,000 people opted to cancel their cards in July alone, taking the number of accounts to the lowest level since February 2007.
Canstar group executive Steve Mickenbecker said he hopes the lower levels of credit card spending will continue, but there are risks on the horizon.
“Curbs to spending and debt reduction may be short-lived,” he said.
“Australia Post reported this month being inundated with parcel deliveries, as people embraced online shopping as a release valve during lockdown.”
Households delay paying bills
There is also mounting concern about the ability of Australians to pay down credit card debt in August and September.
Recent Canstar survey data showed 42 per cent of Australians are delaying certain financial decisions as a result of COVID-19 lockdowns.
Of this group, 32 per cent admitted to delaying paying bills.
“The deeper we get into lockdown, the tougher that [repaying debts] will become,” Mr Mickenbecker said.
“This time around, we don’t have superannuation early release or the broad reach of JobKeeper to help out.”
RBA extends stimulus
Credit data was not the only news to come out of the RBA on Tuesday.
The central bank also extended its bond-buying program to February amid the latest lockdowns in New South Wales and Victoria.
In a decision published on Tuesday afternoon, the bank said Australia’s economic recovery from Delta would be slower than the previous rebound earlier this year.
“Much will depend on the health situation and the easing of restrictions on activity,” the bank said.
Mr Langcake said the RBA is grappling with a new post-Delta reality.
“The ongoing restrictions that are assumed in the Doherty report are quite a bit stricter than what the RBA originally envisaged pre-Delta,” he said.
“You’re looking at a lot more capacity restrictions on any consumption.”
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