Low income earners more likely to carry higher debts

Posted: 12 December 2016 4:52 pm

Credit card debt occupies 8.9% of the average low income earner's annual earnings.

According to a survey conducted by Roy Morgan with 50,000 consumers, Aussies with low incomes are more likely to carry bigger credit card debts than their high income counterparts. While this might not come as a surprise, it is worrying as a large percentage of Australians fall into this bracket and can’t afford to repay the debts they’re creating.

In the 12 months to October 2016, owners of major cards (such as Visa, Mastercard and American Express) had an accumulated debt of $19 million that they planned to carry on to the next statement period. Of course, carrying a balance from month to month (rather than repaying it in full) is how you accrue interest and can quickly spiral into unmanageable debt. From this collective debt, it was low income earners that were more likely to carry a balance from month to month and therefore have a higher debt accruing interest.

According to the survey, participants with an annual income under $25,000 carry $1,100 of debt on average from month to month. This represents 8.9% of their annual income, which is the highest debt to income ratio of all the income groups. This is especially alarming considering that cardholders in this income bracket make up a third of all major card holders.

Meanwhile, the higher the income, the smaller the proportion of the cardholder’s income that is taken up by rolling credit card debt. In the highest income bracket $250,000+ p.a., the average debt was $2,500 per cardholder. This is just 0.9% of their average income. The largest income segment, with just over a third of the market, is the $25,000 to $59,000 group. Their average debts sits at $1,400 or about 3.5% of their average income.

As such, the percentage of cardholders who carry nothing or very little forward to their next statement also increases with income. While only one in five (20.5%) of cardholders in the <$25,000 annual income segment carry forward nothing or less than $100, 56.8% of the highest income group carry forward either $0 or less than $100. Low income cardholders are likely to have trouble repaying their balance once they’ve charged $1,000 or more. While one in four cardholders earning $150,000 - $249,000 carry $2,000 or more at the end of the month, it is usually easier to handle debts at these higher income levels.

Roy Morgan suggests this level of debt is due to rise over the festive spending season. In a finder survey conducted in October 2016, Australians were predicted to spend $539 on plastic over Christmas alone. If you frequently carry debt from month to month, you could consider a credit card with a promotional 0% on purchases to repay the balance without accruing interest for the length of the introductory period. Otherwise, if you’ve already picked up debt and are struggling to repay it due to high interest, a 0% balance transfer credit card could help you clear it out without additional interest costs.

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