There is good debt and bad debt. Is the steady increase in what we collectively owe to banks on credit cards a good or a bad thing?

There is no doubt that Australian households have been under pressure for the past two years, and the recent increases in interest rates have put further strain on ability of households to balance their budgets.

Figures just released suggest that some families are coping by racking up more and more debt on credit cards. Consumers charged $19.6 billion to their credit cards in May 2010, following $18.8 billion in April.

Other facts include:

• Australians now owe $47.4 billion in credit card debt
• This is 7 per cent higher than a year ago
• The average credit card balance is $3248.60
• Credit card repayments in May totalled $19.8 billion, up 10 per cent from a year ago

These are huge numbers, and the ease of spending 'plastic money' to meet a budget shortfall must be contributing to the steady increase in overall credit card debt.

When you consider that the interest banks charge on overdue amounts is 16 per cent to 18 per cent, or more, the amount of money consumers are paying for the privilege of swiping credit cards for instant purchases must be staggering.

What a waste, in my view! While I agree that many families are doing it tough, and turn to credit cards as a last resort, how many others are simply spending all they earn, and then spend even more on credit? A far better approach is doing a proper budget that includes 5 to 10 per cent income saved each month?

The strength of our economy, and the strong jobs market, combine to make us feel we can safely take on more debt today, and sort it all out tomorrow.

The secret of people who become wealthy is that they spend less than they earn. They save systematically, and they invest their savings in growth assets, like property.

In my opinion, spending on credit cards provides short-term relief at the expense of long-term benefit. For example, the cost of meeting monthly credit card repayments could be enough to fund an investment property!

While both are forms of borrowing, the difference in outcome is dramatic.

Credit card debt is very expensive, and is used to fund repayments for short-term consumable items, or luxuries like holidays, electronic goods, clothing etc. These lose their value either immediately, or over time.

Borrowing to service the debt for an investment property, however, funds long-term capital growth and wealth creation.

You be the judge of which offers the better route!

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Source 'Maxing out the cards', Sydney Morning Herald, 13 July 2010, by George Liondis