Escaping the debt trap
THERE is a debt crisis among Australia’s young people. The “buy now, pay later” culture promoted by retailers and lenders is impacting heavily on consumers with the least experience of credit and debt.
Just over 40 per cent of all debt agreements are signed by people under 30. A debt agreement is a low-cost alternative to bankruptcy that more and more people are agreeing to undertake.
The number of people declaring themselves insolvent and unable to repay their debts has also surged, and young people are the worst at managing their credit and finances, according to new statistics.
People aged 25 to 29 are the most likely to find themselves in trouble with consumer debts such as credit cards, mobile phones and loans, the Insolvency Trustee Service of Australia has found.
Even younger people, aged 15 to 25, are also over-represented in the latest debtor profile report from the trustee.
The number one reason behind the increase in people declaring themselves insolvent and signing up to a debt agreement is excessive use of credit, including repossessions, high interest payments and pressure selling.
“It’s phones, it’s cards, it’s loans,” says financial counsellor Jackie Bramwell.
“And it is affecting young people in jobs as well as students. We are seeing a lot of young people in lots of trouble with debt at the moment,” she says.
The second most common reason for debt agreements is unemployment or loss of income.
“When the unexpected hits, that’s when young people get in trouble, they just don’t plan for things like illness, injury or loss of employment,” Ms Bramwell says.
“Footy can be a big cause of debt problems.
“When a young tradie breaks a leg or gets a serious injury he can be off work for five to eight weeks.
“Usually, he hasn’t got insurance and no more than four weeks holidays and sick leave.”
Ms Bramwell works for Eastern Access Community Health in the consumer debt heartland of Melbourne’s east.
She says young people have grown up in a “have now, pay later” economy.
“They are signing up for store, interest-free deals of up to five years. Who knows where they will be in five years or what their financial situation will be?” Ms Bramwell says.
“I mean, look back five years from now, who would have predicted that the world economy would be like this now in 2008,” she says.
And she reports that more debt-laden young people than ever are coming to see her.
“The whole culture around money and borrowing has to change in this country,” she says.
“Everyone, especially young people, but not just them, everyone, has to take responsibility for where we are now.”
Changing our ways might sound like a big task but the tools exist now in the marketplace for young people especially to adopt savings and debt-free spending as a way of life.
Staying out of debt
Beware of paying later, in every form that it is offered. That means beware of having a credit card as well as beware of store offers or anything else that says pay later.
However, not having a credit card is getting harder as we get older and have bills to pay or just want to buy online or order things such as motels accommodation, hire cars and airline tickets.
They all want credit cards for these transaction types.
However, there are cards that act like a credit card but are much cheaper to operate.
These cards offer credit card functions without the high interest rates.
The average credit card has interest rates up around 20 per cent, and some up to 30 per cent.
So not having a credit card can be a huge saving for young people.
Some debit cards issued by credit unions have no monthly account fees, so along with no interest, these cards can be a real bonus for young people.
Savings
High interest, online savings accounts are easy to move money in to and out of.
That is their big competitive advantage over term deposits but that’s not always a good thing.
Locking away savings for three, six or 12 months is very popular right now, says Member’s Equity Bank spokesman Tony Beck.
“People are looking to lock in rates now given that we are in a falling interest rate regime,” Mr Beck says.
“The marketplace is being inundated by special interest rate offers. However, it is important for people to read the fine print.
In many cases, the advertised interest rate is often only a promotional rate, with limited time availability and only available to new customers.
First Home
First Home Savers Accounts are a great idea, but. . .
These accounts look like striking a chord in the marketplace — with mums and dads at least, if not the lenders involved.
Many banks and credit unions have still not launched the new tax advantaged accounts — which attract 17 in the dollar co-contributions from the government.
But Members Equity has launched one of these accounts and says that so far, they are selling fast.
“As a new product under the government’s deposit guarantee, they are proving especially popular with mums and dads,” Mr Beck says.
“Mums and dads like them because they give money to their kids for the specific purpose of saving to buy a house.
“Instead of giving their kids money in an ordinary account which can go on anything, they are moving savings into these accounts,” he says.
Member’s Equity has not advertised its First Home Saver Accounts but in the first two weeks it has opened more than 200.
No minimum deposits are required to open the accounts or keep them open but $1000 must be added each year for four years before any money can be withdrawn.
However, there is a way to make a withdrawal as early as two years and eight months from now.
“If you contribute in 2008-09, 09-10, 10-11 and 11-12 you can access your cash in July 2011 after making your fourth contribution in early July 2011, only 2.75 years from now,” Mr Beck says.
If you haven’t yet bought a home and are not planning on settling down anytime soon, the first home savers’ wait for cash might appeal.
With a little planning and patience, young people can get a good head start on their finances and avoid the pitfalls of our soaring debt problems.
Card providers deny rip-off claims, insisting credit card interest rates are linked to risk, defaults and the cost of obtaining funds in a volatile market.
Mr Swan said he would talk soon to bank chiefs about passing on interest rate cuts to credit card users.
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