Consumers more wary of credit debt

RISING interest rates are making consumers wary about taking on new debt, with a new report showing applications for credit cards and personal loans slipping for the first time in four years.

The Veda Advantage Consumer Credit Demand Index for the second half of 2007 showed the number of consumer credit applications - for credit cards and personal loans - dipped by 2 per cent from a year earlier to 3.19 million.

That is almost 70,000 fewer than in the same period of 2006.

The slowdown in applications corresponds to a significant 35.5 per cent year-on-year increase in the number of payment defaults across 2007, it said.

"Mounting pressure of interest rate hikes and a volatile global economy brought on by America's credit crunch may have caused some Australian consumers to be cautious about taking on new credit card and personal loan debt in 2007,'' Veda's General Manager of Information Services and Solutions Erica Hughes said.

The Consumer Credit Demand Index is an indicator of consumer behaviour in the market and measures the number of individual credit applications, but does not record the dollar value of credit approvals.

As such, it is a measure of consumer sentiment rather than a measure of the volume or value of the overall credit market.

Personal loan applications edged up just 0.3 per cent in the six months to December 2007, a sharp slowdown from growth of 8.8 per cent in the same period of 2006.

The October-December quarter of 2007 saw a 0.8 per cent decrease in personal loan applications, with almost 6000 fewer inquiries than the year-before level.

Credit card inquiries recorded a three-year low in the six months to December 2007. Applications fell to 1.77 million, down 3.8 per cent or more than 70,000 from the same period in 2006.

The last three months of 2007, however, saw a gain of 0.6 per cent from the previous-year level, with almost 915,000 credit card inquiries.

Personal loan inquiries in the second half of 2007 saw a 5.8 per cent decrease compared with the first half, while credit cards grew by only 1.8 per cent, with approximately 31,000 more inquiries than in the January-June period.

"Both credit card and personal loan applications have slowed considerably in the last year when you look at the last three years of October-to-December data,'' Ms Hughes said.

"The year-on-year changes are significant, which could also indicate a greater saturation in the market and an adjustment to strong growth in 2005.''

In October-December 2005, the growth rates for credit cards and personal loans were 14.9 per cent and 6.7 per cent, respectively, compared with the 2007 final-quarter figures of 0.6 per cent growth and a 0.8 per cent decline.

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