Credit card applications falling

By Vanessa Tripodi

It seems that every week brings a new flood of credit card applications and pre-approvals to our homes. You may wonder why people would take on more debt and fall for a new rewards scheme. You would be in good company, since credit card applications have fallen in recent months, a new report finds.

The data, released by Veda Advantage, show a fall of 20 percent in credit card applications for the quarter ending June 2009, compared with the same period last year. In the second quarter, Veda found that credit card inquiries fell by 22 percent compared with the April-June period in 2008. This is compared with a drop of 12.4 percent in inquiries during the June quarter, and the biggest fall in the five years Veda has been collecting this data.

While this drop in credit card applications could be seen as a reaction to the lack of confidence in the financial market, Greg Evans of the Reserve Bank of Australia also suggests the fall could simply be more about consumers "being conservative in signing up for more debt."

However, Australians aren't actually avoiding debt altogether. Where credit card applications have decreased, mortgages have seen a 28 percent increase in the same quarter ending June 2009. Veda's findings of home loan numbers is higher than any reported in the last five years, and points toward more savvy consumers taking advantage of the viable property market, lower interest rates and increased government incentives. Where home loans peaked in June 2009, government grants for first-home buyers were set to expire. However, with house prices still relatively low in most suburbs, and interest rates holding steady for another month in September, it would seem Australians will continue to be smarter in acquiring debt.

The fall in credit card applications may also be attributed to a rise in rejections of credit card applications as banks adjust their risk factors and risk ratings. While consumer confidence may not be a driving factor in the reduced number of credit card applications, the confidence in and reputation of financial institutions has been adversely affected by the global financial crisis. Signing up for more debt from the big banks is a step people will now take more seriously.

Overall, Australian banks are faring well compared with the rest of the world as they continue to report steady profits, albeit, lower ones. Australia's big banks have also retained their high credit rating. So it seems that consumers are simply looking more carefully at the type of debt they are signing up for, and going for good debt such as home loans, rather than bad debt such as an assortment of credit cards.

Article by Vanessa Tripodi

Published: September 8, 2009