Goodbye credit card, hello Afterpay

Credit card Afterpay interest market share debt
RBA data shows in October $37.8 billion was outstanding on credit cards which is the lowest monthly total since 2006 and those trends are likely to continue into January.

There has been a big change emerging in how Australians pay for their purchases and it will have major ramifications into the future.

For decades credit card purchases and balances have been steadily rising to eye-watering levels, contributing to Australia’s record as having one of the highest levels of household debt in the world.

Astronomical card interest rates and the fact that many people fail to pay off their credit cards means that credit card debt pile is something of a self-fulfilling prophecy.

Now, with the pandemic changing spending and savings patterns and the rise of debit cards and buy now pay later solutions such as Zip-pay and Afterpay (ASX: APT) growing in popularity with younger generations, the mountain of credit card debt which flatlined a little after the GFC has now suddenly begun to shrink.

Credit card mountain finally shrinking

Now, for the first time in more than a decade, it looks likely that in the aftermath of the Christmas and Boxing Day retail sales rush the credit card debt mountain will be below $40 billion – a far cry from numbers that were regularly bouncing above $50 billion.

Part of that has been due to accelerated repayments to credit card accounts during the pandemic lockdowns and increased savings and part is also a distinct change in payment methods.

Australian Reserve Bank figures showed that in October $37.8 billion was outstanding on credit cards which is the lowest monthly total since 2006 and those trends are likely to continue into January.

Average credit card balances are also falling – down to just $2,728 in October which is a historically low number.

Interest charges falling as well

As card balances fall, so does the interest being charged which will help to keep the size of the debt mountain shrinking.

Of course, it makes great financial sense for Australians to reduce their credit card balances with the differential between interest rates on cards and on offer for savings accounts now massive.

However, it is not just balances going down, with the number of credit cards on issue also falling as debit cards that rely on money already in bank accounts become more popular and the variety of BNPL options keeps mushrooming.

The popularity of the BNPL players has been so marked that the big banks are now offering a range of similar repayment solutions linked to credit cards – some with zero interest rates but with an upfront fee.

Battle for market share will hot up

It sets up a looming battle for market share between the fast growing but still small BNPL players and the big banks, which are unlikely to take their diminishing market share lying down.

Of course, there are many reports of people struggling to keep up with BNPL schemes, which can become expensive if repayments are missed even if they are marketed as a helpful budgeting tool.

On the whole though, the accelerating trends away from debt and towards technology have been a good thing for Australian households and with more households now getting their debt down and their financial positions in order.

Whether it remains an enduring trend towards lower cost, more responsible credit use is difficult to say but so far things are improving.

Frozen debt thawing faster than anticipated

It is a similar picture with longer term debt with the worst fears about loan deferrals failing to eventuate.

Figures on loan deferrals showed that households and small to medium enterprises (SMEs) are quickly moving back to making repayments on their loans after using COVID-19 emergency deferral measures.

According to the Australian Prudential Regulation Authority (APRA), only 2.3% of housing and SME loans were subject to repayment deferral by the end of November.

At the height of the pandemic crisis the figure was more than 10%.

At the same time housing approvals have been rising fast, up 40% since June with annual figures of almost 170,000.

All of this is great news as borrowers move closer to the deadline for a return to normality on 28 March, when deferrals are due to end.

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