Australians and debt

Australia's total household debt is currently approximately $750 billion – about $40,000 for every man, woman and child.

Household debt has risen much faster than household disposable income. According to the Reserve Bank of Australia, household debt is 166% of income compared to 110% in 2002.

The ratio of personal debt to income in Australia is one of the highest in the world - higher even than America and the UK. For every $100 we earn, we owe $130. Credit and charge cards account for $40 billion of the debt.

Investment borrowings

Much recent debt has been created by people borrowing to invest.

Normally, in Australia, people borrowing to invest account for 25% to 30% of debt. However, encouraged by the lower interest rates and increasing property prices of the last property boom, borrowings to purchase residential property rose dramatically.

Crunch time

Understandably, high personal debt means that millions of Australians must find the money to regularly meet large loan repayments. What’s more, individuals with high borrowings and low savings are extremely vulnerable to any rises in interest rates (which will increase the amount of their loan repayments) and/or economic downturn, including possible job losses.

Bad debt, good debt

Bad debt
Bad debt includes debt you've taken on for things you don't need and can't afford. Sometimes it’s necessary to take on debt to meet commitments that would otherwise cause you to sell important assets. In these cases where debt can make sense, only take out loans for which you can afford the monthly payments.

Good debt
Examples of good debt can be:

• a low interest loan used to purchase a property
• a tax-deductible, low interest investment loan used to acquire property, or managed funds, or shares in a rising market.

However, as many investors have learned throughout history, even debt for investment can become bad debt if the return on the investment is poor, or the repayments become a personal burden.

To sum up: debt is bad when it threatens or harms your future. Debt can be good when it's wisely used to invest or advance one's future.

Consumer Credit Code

Credit transactions for personal, domestic or household purposes that take place in Australia are covered by the Consumer Credit Code. Under the Code, credit providers, including banks, credit unions and finance companies, must inform you of your rights and obligations in any credit agreement with them.

This means they must tell you all relevant information about the credit arrangement in a written contract, including the interest rates that will apply and any fees that you will have to pay. Credit providers are also required to be very careful not to enter into any contract for credit with anyone who would have difficulty in meeting the required payments.

You will also find more information on the Consumer Credit Code at www.creditcode.gov.au.

Your credit report

Your credit report contains reports and information from companies that have lent money to you. It helps prospective lenders determine your ability to pay back your debts on time, usually based on past experience. National credit reporting agencies, also known as credit bureaus, organise the information and keep credit reports securely on file.

Australia’s principal credit bureau is Baycorp Advantage. If you have applied for, or used credit in the past five years Baycorp Advantage is likely to have a file on you. You are entitled to enquire about your credit rating at any time. For more information, visit the web site of Baycorp Advantage at www.baycorp.com.au.

More info

The Australian Securities and Investments Commission (ASIC), which was set up to promote confidence in the financial system and to protect financial consumers, maintains an informative web site with a special education section known as 'FIDO' to try to protect consumers. Visit www.fido.asic.gov.au.