Personal Debt

Ordinary people are carrying more debt than ever. How did it get so big?

Last new year’s eve was no celebration in Australia. 2009 was the first year when Australians’ personal debt was bigger than the country’s economy. New Zealand isn’t any better. Kiwi personal debt is 160 per cent higher than personal income.

On both sides of the Tasman, we owe more.

And as interest rates go up, we’ll pay more on what we owe.

Eventually, of course, it’ll go pear-shaped. We can only owe more than we earn for so long. Just don’t tell the banks, who keep loading you up with debt. Often, debt you didn’t ask for and can’t afford.

Aggressive sales targets for debt—credit cards, lines of credit, mortgages, personal loans—are the dirty little secret of banking. You might think the teller asking if you’d like a higher limit or a new loan is just being friendly, but in fact his or her salary is tied to selling products each and every month.

No sales, no raise.

The thing is, these targets go up every year. It doesn’t matter if your town has lost a major employer. Doesn’t matter if the economy is in the tank. Sales targets only go one way: up.

Now, the average finance worker won’t get rich by meeting these targets. Sometimes, all they’ll get is the bare minimum raise of two or three per cent a year.

But for the CEO and executives, well, it’s a different story. In a word, cha-ching.

Most of their remuneration comes from bonuses linked to high-debt, often high-risk, activities. Like the ones that caused the global financial crisis.

This sales and bonus culture makes short-term, often high-risk, thinking the priority. It doesn’t help banks act in the economy’s interest. In many ways, it makes the economy work in the banks’ interest.