Equifax figures for the first two quarters of 2017 highlight a significant evolution in the use of credit by Australians. In the first quarter of 2017, Equifax reported a year-on-year decline in credit card applications of 3.8%, while personal loan applications for the same period rose 13.5% on a like for like basis. Into quarter two, credit card applications rose by 2.3% year-on-year, while personal loan applications surged once again, hitting 18.4% growth between April and June.
Equifax themselves have stated these numbers are an indication of changing attitudes towards credit in Australia. Although Equifax also believe that consumers are proving circumspect with regards to taking on additional credit commitments in the current economic climate, the trend towards personal loans in comparison to credit cards looks to demonstrate that, rather than being circumspect towards all types of credit, consumers are simply becoming smarter about how they use the credit available to them.
In a word, no.
What seems to be happening is that Australians are continuing to use their credit cards for everyday use. If they’re clearing the balance each month or not allowing themselves to be charged high amounts of interest, there’s no problem with this and there will be many Australians who are building a strong and healthy credit history as a result of this behaviour.
However, personal loans are coming increasingly into play when it comes to making large purchases. If someone is looking to spend $10,000 on a “big ticket” purchase, they’re increasingly likely to apply for a personal loan to cover the cost, rather than using a credit card.
Why is this a smart thing to do?
If you’re the type of person who uses their credit card to pay for your groceries, or other regular expenditure, using it to pay for your expensive purchase could knock your entire lifestyle pattern out of sync. If you have been thinking about how you can stop yourself using your credit card so much, it might seem that using it to pay for something expensive is a good idea, but in reality it’s more likely to make things difficult for you instead.
If you’re doing a good job at managing your credit card account and are building your credit history by clearing the balance in full each month, keep doing this rather than using your credit card for that one big purchase.
When you take out a fixed rate personal loan, you could save a fair amount in interest in comparison to putting the equivalent amount on a credit card, as highlighted in the table below.
With a personal loan, you know exactly how much you are going to pay at each repayment date, and when you are going to pay it. With a credit card, your payment amount will change each month, and depending on the interest rate on your account you could find yourself doing little more than servicing the interest each month.
If you make a big purchase on a credit card it is inevitable you are going to rack up a significant sum of interest, even if you earn enough and have enough disposable income to make a large repayment each month above and beyond the minimum amount.
When you have a fixed rate personal loan, not only are your repayment amounts fixed, but you know when you are going to make the final payment and thus be free of that particular debt.
This means you could take out a personal loan today, pay for whatever it is you want to buy, and know that in five years, for example, you will have repaid the loan in full. If you make that same purchase on a credit card, you probably have no idea when you will be able to clear the balance.
Big ticket purchases aren’t the only thing where there’s a comparison to be made between credit cards and personal loans. Debt consolidation is one of the most popular reasons for taking out a personal loan, while balance transfers on a credit card are a form of debt consolidation, too.
Personal loans are a better debt consolidation option primarily for the two reasons we explored immediately above:
In addition, debt consolidation is often a way to save money on your existing debt – because interest is calculated on a loan differently to a credit card – and also provides a potential opportunity to become debt free quicker, unless as stated earlier you take on new debt.
If you are looking at a debt consolidation loan that would see you repay $21,500 on a loan of $15,000, for example, then it is very easy to look at this and think it is an unattractive deal. Yet, as we demonstrated in the example earlier, you will have paid that loan off in five years. Think about the following questions in relation to your credit card:
Unless you earn enough to repay your credit card balance quickly, or have the self-discipline not to rack up too much credit card debt and only make the minimum repayments, considering a personal loan the next time you require credit could not only save you some dollars but also help you avoid stress and you may become debt free quicker.
To learn more about the benefits of personal loans, we recommend you read more articles here on the NOW FINANCE blog as well as taking a look around the rest of our website.
An added benefit of applying for a personal loan with NOW FINANCE is that we’ll give you your interest rate before you apply, with no impact on your credit score. This means we tell you what your repayments will be, and you can decide based on that information whether or not you wish to apply. If you proceed to an application we will then complete a credit enquiry.
Disclaimer: This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.
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