Shift from cards good sign, says expert

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A consumer shift to personal loans and hire purchase from credit cards is a promising sign, budgeting expert Raewyn Fox says.

Statistics from credit reference company Veda Advantage show personal loan applications have leapt almost 120 per cent and hire purchase applications were up 28 per cent in December from the same month in 2008.

Credit card applications fell 26 per cent in the same period.

With family budgets stretched over the past year and unemployment rising, households were naturally going to turn to credit to survive.

Ms Fox, chief executive of the Federation of Family Budgeting Services, said a shift to more structured finance choices was comforting. "It tells me that people are having a think about what may be a better option, which is really good."

Veda Advantage managing director John Roberts said people were obviously more sensitive to knowing how and when they would pay off debt to stop it spiralling out of control.

However, credit defaults were up 9 per cent for consumers and nearly 40 per cent in commercial debt.

Ms Fox highlighted the fact that a lot of retailers were trying to win sales through interest-free deals for anything up to four years, which could be behind the numbers.

"If that is what they are choosing, then it is really good."

Credit cards were good tools for those that could stick to the budget and pay them off regularly, but for ill-disciplined budgeters they could cost astronomical amounts of interest, Ms Fox said.

The obvious caveat was that any credit line had to be affordable, and missing repayments on any borrowed money was expensive. "That's when the costs start adding up."

Peter Terpstra, founder of personal finance website PerWeek.co.nz, said there was a lot of misunderstanding about credit options. "The major thing is people see credit cards as a transactional tool; and when you buy something major, that's when you look at a loan."

Credit cards and overdrafts relied on revolving credit which was paid back ad hoc and ongoing interest accumulated based on the outstanding balance, unlike a loan which had predictable and hopefully transparent repayment schedules.

He said the most appropriate finance depended on the spending habits of the individual, but the variety of products was often confusing for consumers.

"It is the revolving credit that gets people into the most trouble," Mr Terpstra said. "The best thing consumers can do is understand the difference between a loan and revolving credit."

- © Fairfax NZ News