Can consumers take on more debt?

Do consumers have the ability to repay debts on time?

Do consumers have the ability to repay debts on time?

There are multiple reasons to establish your terms of trade and credit management policies with absolute confidence in every trade or B2C relationship. Not only does it protect your business against defaults, but it also helps you to make sure your customers are not taking on more than they can afford.

As a business owner, the ability of consumers to take on and repay debt should be of major concern to you. It's a major indicator of the health of the economy and the efficacy of monetary policy - such as the Reserve Bank of Australia's latest cash rate decision to hold at 2 per cent. It's also important in your direct relationship with customers, as you want to ensure your books balance and that, at the end of the day, the people you serve are not burdened with excessive debt.

So, how good are Australians at paying back debt, and is there capacity amongst ordinary consumers to handle the high levels of household consumption our economy needs to progress? According to a June 1 release from the Australian Bankers' Association (ABA), households are coping just fine.

As a tangible example, take the Christmas holiday spend. Even half a year away, people are already budgeting for shopping and planning holidays. However, many Aussies fall back on credit cards and overdrafts to make their holiday's merry. The ABA report on household finances shows that last Christmas (December 2014 - January 2015) households spent $50 billion - a massive amount. But, they also paid pack $52.3 billion.

ABA Executive Director Industry Policy, Tony Pearson notes that households are coping with extra spending by building buffers into their mortgages and decreasing the amount of interest they pay on their credit cards. They are also increasing their asset holdings.

"Households continue to save and are managing their finances well. While households are now increasing their borrowings faster than income, this increase in borrowings is being more than matched by an increase in the value of household assets. Every dollar of household debt is matched by almost $6 of assets," said Mr Pearson.

While it's a relief to know that the economy is a bit more even-keeled than some may report, it's also good to know that your customers are likely in a good position to stick to their credit agreements and avoid debt recovery.

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