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Buy now, pay later to credit cards: Which debt is the worst for Aussies?

woman's hand scanning credit card at EFTPOS machine
Australians who are feeling the financial pinch are more likely to default on certain loans than any other kind of debt. (Source: Getty) (Getty Images/iStockphoto)

A new study has uncovered the which payments Australians are most likely to default on first amid economic uncertainty and cost of living pressures continue to rise.

Research by the University of Sydney and credit bureau illion revealed that Aussies staring down the wall of financial uncertainty are more likely to default on credit cards and personal loans than any other kind of debt, with consumers four times more likely to default on a credit card compared to personal loans.

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


“We have found that ultimately, preserving an open line of credit – some level of liquidity – is very important when it comes to financial stress,” Grant said, adding that this is not something people actually think about – at least until it directly affects them.

“For instance, one credit card can be maxed to the limit while the other may still have $10k on it,” he said.

“Time and again we saw that one card would be sacrificed, whereas another would continue to be serviced.

"Therefore, factors such as whether the card still had credit available were likely to influence consumer choices.”

'Pecking order of defaults'

The study, which was carried out on both Australian and New Zealand consumers, also uncovered a ‘pecking order of defaults’ as consumers attempt to tighten their belts amid rising costs.

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

“What we have uncovered is that it’s really only when all other options are exhausted –after that person has already defaulted on other products, and has no choice.

“Products with some level of utility, such as lived-in houses, cars, and mobile phones, rather than credit that has already been spent, appear to be valued by consumers.

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

Grant also explained that if consumers are able to use discretion, they may opt to choose to default.

“This is removed with buy now, pay later payments. Direct debit payment for any bill is harder to avoid," he said.

"If you have to call someone to change the details in your bank account to avoid a payment, it will be harder, and will have other consequences, so you are more likely to avoid it."

Prioritising payments

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

“Making credit repayments on products that appear to hold the highest utilitarian value is seen as most important. Consequences, such as continued access to credit and a loss of livelihood drive these choices,” Landgraf said.

He noted that where a person’s livelihood is at stake through a loss of a house or car, the likelihood of prioritising repayments on other credit products is very low.

New research by the University of Sydney and credit bureau illion shows that there is a 'pecking order of defaults' when people are belt tightening. Credit: Getty
New research by the University of Sydney and credit bureau illion shows that there is a 'pecking order of defaults' when people are belt tightening. Credit: Getty (Getty Images/iStockphoto)

“It is really only a total financial collapse that appears to lower the priority of a car loan or home loan repayment,” Landgraf explained.

“Similarly, when a person defaults on their overdraft, this is quickly followed by a default on other credit facilities. It’s therefore a strong indicator of financial ruin.”

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

“The repayment of phone instalments is generally prioritised over credit obligations, suggesting the smartphone is now a bedrock of people’s livelihood,” he added.

illion also found that people holding both buy now, pay later and credit card products tend to spend more on their credit card than consumers holding only a credit card.

According to Landgraf, holding both buy now, pay later accounts and credit cards appeared to give the consumer the perception of greater spending power, which in reality, risked exacerbating their financial stress.

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

Top 10 bills most at risk

Table of bills most at risk of default
(Source: illion)

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