By Elson Goh, Certified Financial Planner & Instructor At Curtin University
The latest figures from data registry and analytics business, illion show that there has been an increase in personal bankruptcies of 4% across Australia and WA experienced the highest one year increase of 11.7%.
Although this paints a grim picture, what is more alarming is that the average age of people declaring bankrupt is getting younger.
Being a bankrupt is a serious thing as it sticks with you for 3 years and your credit position, future employment and borrowing capacity will be affected. For a young person early in their careers and wealth journey, this can be devastating.
To understand how to avoid being in the situation, we must first look at what are the causes of personal bankruptcy. The Australian Financial Security Authority lists the top 4 causes being (for 2016-2017):
- Excessive use of credit 35%
- Unemployment or loss of income 32%
- Domestic discord or relationship breakdown 13%
- Ill health 7%
Excessive use of credit has been reported to be the main cause of personal bankruptcy.
Debt agreements in Australia has been increasing significantly over the last seven consecutive quarters. Debt agreements are usually for people struggling with unsecured debt like credit cards, personal loans and household bills. Bad spending habits and the use of credit do not go well together.
Credit is a fantastic and convenient instrument. It allows for ease of transacting and the ability to purchase goods and services without saving for it. However, it can also put people in financial difficulties when left unchecked.
For young people who are often used to the convenience, here are some suggestions to avoid going into financial problems:
- Reduce your credit card limit. A smaller limit may restrict your large impulse purchases
- Save up a bigger deposit for your first home. Low deposit home loans do not provide you with an adequate buffer and would leave you with very little options when property prices stagnate or decline
- Review your personal insurances, especially income protection. You need to create a safety net for the unexpected
We have seen active steps to address some of the issues in the banking and financial services sector. However, more needs to be done to change the culture of easy access to credit and the consumers’ understanding of its potential impact. Perhaps restrictions can be placed on credit limits based on age, more education in schools or government funded apps to help monitor spending. Whatever the solution may look like, something needs to be done before it is too late.