Mortgages force credit binge

By www.brokernews.com.au By Ben Abbott, 25 October 2010

Median credit card debt rose by 24% over the last quarter, as households turned to their credit cards in an effort to stay on top of their mortgage repayments.

The latest Household Financial Wellbeing Index from ING Direct found that borrower comfort levels with home loans fell over the third quarter of 2010, even though 49% of households with a mortgage are making additional repayments on their loan.

The extra repayment efforts saw the median outstanding mortgage balance drop from $175,509 in the second quarter to $174,959 in the third quarter. However, additional repayments consumed disposable income, and households turned to their credit cards as living costs have increased to fill the cash gap.

Outstanding card debt grew "alarmingly", according to the index, with the median balance rising from $1,673 in the second quarter to $2,072 in Q3 – a leap of 24%.

More Australians also embraced credit cards, with only 10% of Australian households living without credit cards in Q3, down from 12% in Q2.

ING Direct CEO Don Koch said the situation is "potentially dangerous".

"Households are taking the right approach by aiming to pay off their loans early and avoid dipping into savings. But the over-reliance on credit cards is a worrying trend," he said. "Home loans are underpinned by an asset that will rise in value over time. The same cannot be said of card debt. The higher interest rate applicable to credit cards will see many families burdened by growing interest charges."

Koch suggested in the long run it could create a “devastating debt spiral”, and urged homeowners to pay down credit card debt ahead of their home loans.