Which debt is the worst for Aussies?

Woman hand scans credit card at EFTPOS machine

Australians feeling the financial distress are more likely to default on certain loans than any other type of debt. (Source: Getty)

A new study has uncovered which payments Australians are most likely to default on as economic uncertainty and pressure on the cost of living continue to mount.

Research from the University of Sydney and credit bureau million has found that Australians staring at the wall of financial insecurity are more likely to default on credit cards and personal loans than any other type of debt, with consumers four times more likely to have one Credit card defaults versus personal loans.

dr Andrew Grant, senior lecturer in finance at the University of Sydney Business School, said people are more likely to keep an open line of credit when they feel the pinch.

“We’ve found that ultimately, maintaining an open line of credit — some level of liquidity — is very important when it comes to financial stress,” Grant said, adding that it’s not something people actually think about — at least until it directly affects you.

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“For example, one credit card may be maxed out while the other has $10,000 left,” he said.

“We’ve seen time and time again that one card is sacrificed while another continues to be served.

“As such, factors such as whether there was any balance left on the card likely influenced consumer choices.”

“Pecking Order of Defaults”

The study, which included both Australian and New Zealand consumers, also uncovered a “pecking order of default” as consumers seek to tighten their belts in the face of rising costs.

“We wanted to find out what would cause a person to default on their home payments,” Grant said.

“What we found is that it really only applies when all other options have been exhausted – after that person has already defaulted on other products and has no choice.

“Products with some utility, such as homes, cars and cell phones, seem to be more valued by consumers than loans already spent.

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“It would be particularly difficult to ‘get back on your feet’ without access to basic services.”

Grant also explained that when consumers have discretion, they can choose to default on payment.

“This will be removed with Buy now, pay later payments. Paying by direct debit for every bill is harder to avoid,” he said.

“If you have to call someone to change your bank account details to avoid making a payment, it becomes more difficult and has different consequences, so you’re more likely to avoid it.”

Prioritization of Payments

Consumers ultimately make choices that directly benefit them, added Michael Landgraf, analytics manager at illion bureau.

“Making loan repayments for products that appear to have the highest utility value is considered most important. Consequences such as continued access to credit and loss of livelihood drive these decisions,” Landgraf said.

He found that where a person’s livelihood is at stake through the loss of a home or car, the likelihood of prioritizing repayments on other loan products is very low.

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New research from the University of Sydney and credit bureau Illion shows there is a

New research from the University of Sydney and credit bureau illion shows that as people tighten their belts, there is a “pecking order of defaults”. Photo credit: Getty

“Actually, it’s just a total financial collapse that seems to diminish the priority of a car loan or a home loan repayment,” Landgraf explained.

“Similarly, if an individual defaults on their overdraft facility, defaults on other credit facilities quickly follow. It is therefore a strong predictor of financial ruin.”

Mobile phones also have priority in the eyes of consumers, according to Landgraf.

“Repaying phone payments is generally prioritized over loan commitments, suggesting that the smartphone is a mainstay of people’s livelihoods today,” he added.

illion also found that people who own both buy now and pay later and credit card products tend to spend more on their credit cards than consumers who own only one credit card.

According to Landgraf, holding buy-it-now, pay-later accounts and credit cards gave consumers the impression of greater purchasing power, which in reality risks exacerbating their financial burden.

“Given consumer repayment preferences, this is a clear risk for credit card issuers,” Landgraf said.

The 10 most vulnerable bills

Table of invoices most at risk of default

(Source: millions)

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