Opinion
Young people are taking on more debt. We should all be worried
Victoria Devine
Money columnistThis week, Australians were handed a stark reality check on what the true price of the ongoing cost-of-living crisis could be for younger generations, even well after it passes.
According to analysis from credit bureau Illion released this week, the risk of defaulting on loans has decreased for Australians aged over 30, but for those aged under 30, and in particular those aged under 25, the risk of default has actually increased.
The risk of defaulting on a loan is on the rise for young Australians, but its a crisis that should concern all of us.Credit: Dionne Gain.
While the risk of default grew across all age groups in 2023 following ongoing changes to interest rates, in the first quarter of 2024, the risk dropped for Australians aged 41-50, and unchanged for over 50s.
But for those aged 26-30, the risk grew by 2 per cent, and for Australians aged 25 and under, it grew by 2.5 per cent, marking a clear generational divide between those who are slowly getting back on track and those who face a growing risk of falling behind.
Considering the average age of a first-home buyer in Australia is now aged 36, it’s safe to estimate the majority of debt Gen Z – that is those born between 1997 and 2008 – and Millennials – born between 1981 and 1996 – are currently at risk of defaulting on is other loan types like credit cards, personal loans (including car loans), and buy now pay later schemes.
According to the Reserve Bank of Australia, there are 13.5 million active credit card accounts in Australia as of September 2023. While this is actually a reduction from previous years, that still translates to almost 64 per cent of Australians aged over 18 having a credit card – hardly a niche market.
Australians are increasingly relying on borrowing money simply to get by and make ends meet.
It’s also worth remembering that the figures we’re referring to aren’t play money. While the total amount of national credit card debt is currently lower than it was in 2018 ($52 billion compared with today’s $41.6 billion), what’s significant is that ever since hitting a low of $35 million in September 2021, national credit card debt has been on an upwards trajectory.
Currently, the average credit card balance for an Australian sits at just over $3000 and has an average interest rate of 18.38 per cent, making it one of the highest rates across the loans board.
When it comes to personal loans, the picture gets worse. Australians are borrowing a total amount of $2.5 billion every month via personal loans, with the average loan amount coming in at $22,643 with an unsecured interest rate of 13.87 per cent per annum.
It’s also worth bearing in mind that this does not include personal loans taken out for refinancing purposes, which, the ABS says, accounts for a further $200 million each month.
What’s most telling about the personal loan data is its similarities to what we’ve seen with credit cards. The number of personal loans being taken out by Australians has increased every month since April 2020 – the same time the peak of the COVID-19 pandemic hit.
Across the same time period, data shows that personal investment borrowing decreased sharply, which suggests Australians are now turning to personal loans for more essential items like cars, home maintenance and consolidation of other debts and are increasingly relying on borrowing money simply to get by and make ends meet.
When it comes to BNPL schemes, data shows that 40 per cent of us have used this loan type within the last six months, with the most prolific users being, you guessed it, Millennials (59 per cent) and Gen Z (52 per cent).
While the number of Gen Z users has decreased significantly since December, for Millennials, it’s an increase of 9 per cent, with the average BNPL debt balance coming in at $973.
Of course, not all debt is inherently bad. But it’s important to remember that not all debt is created equal, either.
When debt relates to something that isn’t a long-term asset like a property or a car, but rather groceries or a doctor’s visit put on a credit card, having that follow you around for months can have a profound psychological effect on a person and their relationship to money, particularly when they’re young and still developing an understanding and trying to build confidence around money.
Add this to rents rising by an average of 12 per cent nationally (though in some cities it has been by as much as 45 per cent), the cost of some university degrees literally doubling over the past five years, and a rise in youth underemployment from 14.8 per cent in March to 15.7 per cent in May, and suddenly the alarm bells begin to ring.
If you are unlucky enough to find yourself among the cohort of young Australians who have or are at risk of defaulting on personal loans, the fix is not always as quick as moving back in with your parents to save on rent or getting a second job (assuming you can find one in the current market).
Even after a debt has been paid off, if a default is recorded on your credit score it remains there for five to seven years. If you’re aged 29, for example, that period takes you precariously close to 36 – the age when the average Australian is preparing to buy their first home and trying to secure a mortgage.
Following the global financial crisis, we saw how the worst-case scenario plays out for young people. We know how relatively short-term pain for the whole can disproportionately impact the long-term financial wellbeing of those just entering the economy.
So while a rise in default risk of 2.5 per cent or 2 per cent rise might not sound like a lot at a glance, when that risk is combined with everything else playing out right now, the path for getting out of debt – let alone even thinking about trying to get ahead – becomes less and less clear for those who are only just starting out.
Victoria Devine is an award-winning retired financial adviser, best-selling author and host of Australia’s No.1 finance podcast, She’s on the Money. Victoria is also the founder and director of Zella Money.
- Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their personal circumstances before making any financial decisions.
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