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Borrowers cut back on credit, but rising rates are pushing more to the brink

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Credit card applications are on the rise, but everything else is down as more borrowers miss mortgage repayments.

New data from Equifax Australia shows that consumers are cutting back on credit while also struggling with existing loans.

The biggest declines are in applications for unsecured, short-term credit like personal loans (down 5.9%) and buy now pay later, down 26.3% (all declines are for the second quarter of 2023 compared to the same time in 2022).

Declines are more modest on secured credit, with home loan applications down 2.8% and car loans down 5.4%.

Equifax general manager advisory and solutions Kevin James said this slowdown in credit "suggests that consumers are spending less in the face of compounding economic pressures."

Credit cards are the only credit type seeing an increase in applications, up 5.9%.

These figures suggest Australians are being more considerate with their credit, cutting down on more impulsive, short term debts like BNPL.

But mortgage arrears, defined as borrowers whose accounts are 30-89 days overdue on a payment, have risen 33%.

Rising interest rates and cost of living pressures are clearly affecting borrowers' ability to repay loans.

And while the decline in buy now pay later usage suggests consumers are spending less, those that do use BNPL are increasingly using it to pay for essentials.

In a recent survey by Financial Counselling Australia (FCA), financial counsellors reported that their clients were using BNPL to pay for food (71%), fuel (41%) and utilities (32%).

"BNPL was never intended as a way to pay for everyday living expenses," said FCA CEO Fiona Guthrie. "But the ease of accessing BNPL loans, combined with mounting cost-of-living pressures has meant more people are resorting to it just to get by."

This suggests that buy now pay later has become an emergency lifeline for people who are struggling financially. But it pushes people even further into debt.

95% of financial counsellors reported that reliance on BNPL was leaving their clients worse off.

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