Do You Love Your Credit Card? 

Are Australians Addicted to Credit? 

You know this is an interesting question because there are many different ways to think about it. Plus many different debts e.g. credit card, home loan, personal loans, and interest free. But I just wanted to look at one product. Credit Cards - are we getting more in debt on our cards?

At the midway point of 1997, we as a country owed $7.1 billion on cards. By midway through 2011, we owe $51 billion. OK, this is not a small jump; this is a mind-blowing jump. So you might think, yes we are getting more in debt over this 14 year period. However, you have to take into account inflation and population growth.

Looking on the RBA website, we can work out from 1997 to 2011 there has been an annual increase in inflation at 2.8 per year. Searching on the internet, I can find in 1997 there were 18.5 million people; however now there are 22.6 million people.

So let’s work out some figures. We can start by dividing the $7.1 billion 1997 debt evenly by the 18.5 million people. This means at the midway point in 1997, every man, woman and child in Australia owed $383 dollars.

Now we can do the same for this year. We start by dividing the $51 billion by 22.6 million people. Now we find out each man, woman and child owes $3551. OK, this is a big difference.

But I hear you saying prices have gone up. $383 in 1997 would buy you a lot more than $383 today. Yes, you’re right! In fact a basket of goods in 1997 which totalled $383 would cost you $550 in today’s money terms. This is a long way from the amount of $3551.

In fact we owe near 6.4 times that for every man, woman and child of what we owed in 1997. This is in real money inflation and population adjusted terms. Why is this? Are we struggling to pay our monthly bills and making up the difference with credit cards. Or are we running around using our cards like our own genie, running up bills left right and centre.

Whatever the case might be, it’s a real eye opener! We have been increasing our credit card spend each year by year. We have added on average, 17.1% per man, woman and child on our national credit card bill over 14 years. Remember, inflation of items has only gone up 2.8 percent per year every year. So in inflation adjusted terms, its 14.3% each year.

*** The following story you might need to read a few times for it to sink in. However, please do it as it is a good take to prove credit cards’ overall market growth. ***

Now just to prove my point that Australians are addicted to credit, let’s use an analogy of a milkman, but use figures from the credit card market.

The milkman works in a town called Cowtown and he supplies 100% of their milk. In this town in 1997 there were 1850 people. Each person buys milk for a year for $100. In 1997 he makes $185,000 profit from his milk run.

Each and every year he increases his milk cost by 17.1% right upto 2011. As he is the only person supplying milk in town, there is no choice but to get your milk from him. Also on average the town grows in population each year by 1.45 percent to 2260 in 2011.

Do you know how much he would earn in 2011? How about $2,062,882. Just with a small overall growth rate of people and a large increase in his milk prices, his profits are sky high. To put this in perspective, even in inflation-adjusted terms this would be worth $1,435,000 in 1997. This is 7.7 times his 1997 wage.

But Australians don’t live in Cowtown. But we have increased our total borrowed by this amount each year. Can you see how Australia might be truly 100 percent addicted to debt? Can you see why banks love consumers to have a credit card? Why banks will increase your limit at the drop of a hat? And why banks want you to take as long as possible to pay back your card.

Please Australia wake up. We are gouging ourselves to death on credit cards. We need new laws to basically protect us from ourselves.

P.S. if the milkman continues this price rise and the town keeps growing at the same rate for five additional years, in 2016 he will earn $4,879,308.

Credit Card Points Systems— What A Joke

We here at Mr Home Budget hear many reasons why people can’t give up their credit cards.

“We need it for security.”
“Credit cards are much easier than cash.”
“You need a credit card in today’s society.”
“We pay it off every month.”

While we could debate each point and make a strong argument as to why they don’t make sense. The one reason which does make me chuckle a bit is, “We get the free loyalty points.” In this article, we will really try and pull this reason apart; take it down and destroy it. If you are someone who loves their loyalty points, you might want to look away now. Because by the time we are finished they won’t mean as much to you.

Let’s look at the top three major banks in Australia. Each one has a credit card with reward points. We are going to look at each, one by one and break them down. We are going to use the example of swapping your rewards points for gift certificates, as gift certificates are the closest thing to getting back cash. Plus we will pick gift certificates which everybody would be interested in like supermarket or petrol gift certificates.

Did you know the average Australian spends around $14,300 a year on credit cards? So we will pretend we are using an example of the average Australian. Also while all these figures are correct as of 7/06/2011, they might change. We will not use the bank’s real names.

 Bank One: You get one point for every dollar you spend on this bank’s credit card.

You could swap 11,040 worth of points for a $50 Caltex voucher. This is equal to 0.004 cents per dollar. This is not even half a cent per dollar spend. So let’s say for example, this card spent the $14,300 average, you would get back a total Caltex voucher for $64.76 (prorata). Now this is the good news. The bad news is this card has an annual fee of $89. You are down $24.24 for the year. In fact you would have to spend a total of $19,651 just to break even on the $89 fee. After this amount, you would then start earning money ... but very slowly.

 Bank Two: Is very much the same. You earn one point for each dollar spent on their MasterCard. But to earn a $100 Coles gift card, you must spend $17,200. Spending the average amount that a normal Australian spends, you would earn $83.10 a year towards the card. But the annual fee is $89. You are still $6 behind the 8 ball.

Bank Three: You receive one point for every dollar spent on your MasterCard. A Westfield Shopping Centre card would cost you 17,950 points. So you would earn $79.66. But there is just one problem; the annual fee is $100. Yes, once again you are in the red to the tune of $20 a year.

So as you can see, none of the reward points really add up. And by the way, this is if we are being sensible with our reward points. In the example, we are using them for things we are probably going to purchase with cash. But it’s easy to get tempted to use these points for trinkets or things like movie tickets. You lose even more money down the drain.

So each year, you are down money by thinking you’re earning so-called “reward points”. But this example assumes you are paying your bill on time. Not incurring any interest, or getting any of the other fees and nasties the banks like to hide in your contract.

Also, there have been studies done which show people spend more on purchases when they pay for things with their credit card. This is due to not having to pay then and there for the item. It’s your brain working on the subconscious level. And guess what, this extra spending is proven to be turbocharged when you are collecting the so-called reward points.

Credit cards are bad in general, but never use the excuse you only have one because the reward program is so good. You have just seen the facts! Cut up your cards today and get rid of them from your life.