May 5, 2011
More Australians are shopping smarter and using their transaction accounts for purchases rather than credit cards compared with this time last year, new figures have revealed.
The total number of debit transactions jumped 17 percent in the year to February 2011, while credit card use grew only 6 percent in the same period, according to Reserve Bank of Australia (RBA) data. Meanwhile credit card balances accruing interest dropped for the first time since November last year, signalling a shift in consumer appetite for plastic.
However, the figures also revealed that total credit card balances and credit limits are still at record highs with $49.3 billion of credit card debt in February, up 5 percent on February 2010.
Damian Smith, chief executive of RateCity, said an increase in debit transactions reflects both consumer caution and increased financial discipline. It may also reflect an explosion of online buying sites, particularly international sites, which may be driving consumers to debit cards.
"While it’s encouraging to see more sensible use of credit cards and greater use of debit cards, there is still a great deal of debt being built up on many credit cards across Australia," he said.
Credit card costs outpace government benchmark
The real concern is the higher cost of credit cards, with the average personal credit card purchase rate (across almost 300 personal credit cards monitored by RateCity) increasing by 168 basis points over the past two years. That’s more than three times the increase of the RBA’s official cash rate, which has risen by 50 basis points.
"What this means is that a $4000 debt is costing you about $70 more per year in interest than it was two years ago," he said.
But it’s not all bad news for consumers, which can save significant dollars by switching to more suitable credit cards and transaction accounts.
"Credit cards offer great flexibility for consumers," Smith said. "But they must remember that owning a credit card is taking on the responsibility of a debt – much like any type of loan but with more opportunity to ‘defer’ debt payments – which can cause real problems down the track.
"For those that use credit cards often, it’s even more important to make sure the card’s interest rates and fees suit how you use it. If you don’t pay off your debt each month for instance, there’s no point paying high annual fees and rates for a rewards card."
Transaction accounts also vary significantly between each financial institution in terms of how many transactions you make each month, the fees and charges, as well as features and services, so it pays to compare transaction accounts before you sign up.
RateCity monitors 80 personal transaction accounts that don’t charge a monthly service fee – that’s 60 percent of all accounts. Of those, more than half don’t charge a fee for direct debit.
So clearly, transaction accounts can be a much cheaper alternative to credit cards and if more consumers move towards debit transactions and switch their accounts to better deals, the greater the competition there will be between institutions.
Related transaction account links