Dun and Bradstreet warns of 'irreversible credit card debt spiral'

Credit reference checking company Dun and Bradstreet has warned a rise in credit card interest rates later this year could drive indebted young New Zealanders and those with families into an "irreversible debt spiral". Credit card users currently face interest rates of around 18.5% and have seen little benefit in the cut in the Official Cash Rate (OCR) to 2.5% through 2008 and 2009. Banks are expected to raise their credit card rates in line with OCR rate increases later this year. Financial markets are expecting the OCR to rise to around 4.0-4.25% in the next year. Dun and Bradstreet made the comments as it released a survey showing a higher percentage of young Kiwis are expecting to use their credit cards in the coming months to pay for otherwise unaffordable expenses. Dun & Bradstreet's Consumer Credit Expectations Survey in the March 2010 quarter found 29% of those surveyed expect to use their credit cards and 28% were concerned about their expenditure over Christmas. Financial stress was concentrated among 18-34 year olds and families with children. Of those surveyed, 40% of young people expect to use their credit card during the March quarter 2010, up six percentage points from the previous survey in the September quarter of 2009.

Expectations of credit card use to pay for otherwise unaffordable debt during the March quarter by those aged 35-49 and 50+ is 33% and 19% respectively. The younger age group and families with children have a significantly higher percentage to the national average of 29%, indicating a need to turn to credit cards in the following months, the D&B survey showed. Dun & Bradstreet's (D&B) New Zealand General Manager John Scott said it is not suprising to see certain demographics are now struggling with their spending as a result of pressure the global credit crisis placed on families over the 12-24 months. "Further increases in the cost of credit for those groups already under pressure could trigger an irreversible spiral into serious debt troubles," Scott said. The Reserve Bank cut the Official Cash Rate by 575 basis points to 2.5% between July 2008 and April 2009, but Reserve Bank data shows the average bank credit card rate has fallen by only 170 basis to 18.5%. See all credit card rates offered in New Zealand here. There is concern that as the Reserve Bank moves away from the emergency lows, consumers are likely to feel the pressure as banks pass on the costs, he said. "The Reserve Bank is expected to move rates away from the emergency lows seen during the height of the crisis throughout 2010 and the banks are likely to pass these costs on to consumers."