Money: Diving deep into debt

By MARK FRYER

Once upon a time, when life was simpler, careful budgeters regarded credit cards as a quick path to financial ruin.

Nowadays they are told to make them the centrepiece of their financial strategy.

The new logic goes like this: put everything on the card and keep your own money in the bank as long as possible so it can earn interest or - if you have a mortgage - so it can reduce your interest bills.

With most cards offering up to 55 days free credit, the theory makes sense. If you consistently put as much as possible of your shopping on the plastic, holding onto your own money for that time can add up to a worthwhile amount of income, or a reasonable saving on a home loan.

But turning theory into reality means religiously paying off the card in full by the due date. Otherwise, the interest-free days no longer apply. And with the interest rate on most cards more than twice as high as mortgage rates, they are a very expensive way to borrow.

So are we doing things the way the theory says? Not so you would notice.

Reserve Bank figures suggest that we are using cards the way we always have: buy now and hope that somehow - magically - we will acquire the means to pay by the time the credit card bills come in.

Over the past four years our outstanding credit card debt has grown from $1.69 billion in February 1997 to $2.92 billion last month. If you take business spending on cards out of the equation, our personal credit card debt still amounts to about $1000 for every one of us over the age of 18, without counting store cards, which aren't included in Reserve Bank figures.

None of which would matter if we were using our cards as smartly as the theory suggests.

If we were, an increasing proportion of our credit card debt would be interest-free.

We would be using our cards more, but paying them off on time to avoid interest charges. But that's not what the figures show.

Four years ago, in February 1997, about three-quarters of all credit card debt was accruing interest.

Today, when we are so much more enlightened about these things, about three-quarters of all credit card debt is still accruing interest, and there's a lot more of it.

There may be a group of disciplined budgeters out there, religiously repaying their credit cards every month but, if so, they are more than made up for by another group who are diving ever deeper into debt.

All of which suggests that before adopting any strategy that revolves around using your credit card more, it would be worth asking whether you really, honestly, have the discipline to keep up the payments.