More struggling Australian families than ever do not expect to manage their existing debt levels in the coming months. The numbers of families expecting to have to default on credit like mortgages, utilities, phone and internet bills in the coming months has increased. One in four Australians would default on their mortgage if they were short of cash. This is a worrying trend, and points to a continued lack of knowledge about the ramifications of defaulting on bill payments. For people who end up with bad credit history, they can potentially enter into a cycle of debt that can take years to recover from.

By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repairs and

Alarming statistics have arisen from Dun & Bradstreet’s Consumer Credit Expectations Survey from this month – projecting into the June 2012 quarter.

Over a third of Australian families will struggle to manage existing debt levels, with nearly half (46%) of low-income households expecting difficulty managing their debt. This represents a rise of eight percentage points since the fourth quarter of 2011, 11 points above the national average.

Here are some of the statistics coming out of this survey:

Default expectations

– Overall, more than one in four (26%) of Australian consumers who are short of funds would forgo a mortgage payment.

– Of those families that do find themselves short of cash in the coming months, more than one in ten (12%) would default on a mortgage repayment or internet bill. Fourteen per cent of families would choose to default on their pay television account.

– Nearly one in five (19%) low-income households would sacrifice an electricity bill, three percentage points above the national average.  While six per cent would forgo a mortgage repayment.

– An increasing number of young Australians also plan to default on mortgage repayments if short of cash. The survey also found 18 per cent of 25-34 year-olds said this would be the first bill to be sacrificed during low cash flow periods. This also increased noticeably among West Australian (up 13 points to 20%) and Victorian (up six points to 11 per cent) consumers.

Credit use expectations

– Number of consumers planning to use redraw facilities on their mortgage to make a major purchase was up four percentage points year-on-year to 22 per cent.

– 41 per cent of Australian households with children will be forced to rely on a credit card to cover living expenses, up two percent since late last year.

– A growing number of households earning less than $50,000 a year are planning to use credit to cover costs (41%), up from 37 per cent in the December quarter 2011.

– However, 27 per cent of families plan to apply for new credit or a limit increase during the June quarter.

According to Dun & Bradstreet’s CEO, Gareth Jones, the survey results indicate a worrying cycle of debt accumulation and dependency among struggling consumers.

“Nearly one-in-three low-income households expect rising household debt levels, but with limited ability to pay this down. When consumers are increasingly forced to accumulate debt they are unable to manage, just to keep the family finances afloat, this has the potential to quickly become a vicious cycle,” Mr Jones said…

“Before consumers apply for more credit they should assess whether or not they can afford to repay the funds and check their credit report to ensure there are no black marks listed on their file that could make it harder or more expensive to get credit,” he said.

These statistics show that we are just not doing enough to educate large groups of the Australian population on the ramifications of increasing debt, and the importance of meeting credit commitments. Unfortunately, we can’t do anything about the rising cost of living for them, but we can help people prioritise. There needs to be a major shift in the Australian psyche about all credit and a major education campaign on managing debt. I think if we don’t want to end up with some kind of credit crisis in Australia – it is essential.

Gareth Jones puts it finely when he makes the point about how consumers view bill payments:

“Consumers tend to view non-core expenditure such as phone or internet bills as dispensable, however the damage to an individual’s credit history can be an issue irrespective of the type of account defaulted on. The default will stay on a credit report for five years and can severely limit a consumer’s ability to access affordable, mainstream credit in the future,” Mr Jones said.

The ramifications of overdue accounts

Any credit commitment which is more than 60 days in arrears – whether that is a mortgage, a credit card or a phone bill – is considered an overdue account, and a creditor will list this overdue account on the consumer’s credit file as a default.

A default on a credit file is considered a ‘bad credit rating’ by all major lenders, as well as phone and utilities companies.

The consequences of a consumer having a default on their credit file is refusal of applications for credit through most mainstream lenders for 5 years from the date the default is listed on the consumer’s credit file. The consumer is then forced to either seek alternative credit – often at sky-high interest rates, or do without credit for 5 years.

We worked out consumers with defaults on their credit file or a bad credit rating will be hit with a whopping average $15,046.57 or more in additional home loan repayments over the first three years of their loan (this calculation is based on a home loan of $300,000 over 30 years on non-conforming loan interest rate of 9.5% vs standard variable rate of 7%).

What this could mean for Australian consumers

If, as the Dun & Bradstreet Consumer Credit Expectations Survey predicts, the number of Australians who say they have to use credit to pay down debts is increasing – and the number of Australians who say they may default on credit is also increasing – we could see more and more people thrown into a cycle of having to find alternative credit sources at high interest rates as the only means of paying down debts. Or alternatively we could see a higher rate of bad credit history – defaults, Court proceedings and Bankruptcies across the board in Australia.

When a consumer seeks credit rating repair, often times they have been uneducated on how they should have handled their difficult circumstances and particularly financial hardship, prior to the default being issued on their credit file. In this instance I believe the job of a credit rating repairer can be two-fold, in one instance we are repairing the credit rating, and in the second we are educating those consumers on what the correct procedure should have been when faced with that scenario.

If more and more people are in crisis,  then the finance industry, credit industry and government as a whole need to tell struggling consumers about their options for managing debt.

Consumers need to know throwing away their financial futures by defaulting on repayments is the last option, not the first when they are struggling with their debts.

For more information on obtaining and managing credit, or for information on clearing credit rating inconsistencies through credit rating repair, contact MyCRA Credit Rating Repairs tollfree on 1300 667 218 or visit our website

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