Default risk for credit card holders in Victoria rose by 8 per cent in the year to December and by 6 per cent in NSW over that period.

Hasseldine attributes this to increased credit card use as the cost of living crunch hit households last year.

“About 12 months ago there was a large increase in the number of credit card applications, now we’re seeing that many of those new credit cards are falling behind on repayments,” he said. “It seems that households have used the credit card to be able to make ends meet and are now, in turn, finding it difficult to stay on top of all their credit card repayments.”

A Reserve Bank review of the financial system, released this month, said one in 20 home borrowers on variable interest rates had expenses that “exceed their income” as they struggle to meet mortgage repayments. Lower income borrowers are more likely to be in this group.

“Much of this year will remain challenging for borrowers already under pressure,” the RBA warned.

The illion analysis showed home loan stress was most pronounced in Victoria where the default risk was 10 per cent higher in the 2023 December quarter compared with the same period a year earlier. In NSW, the default risk for home loans was up by 1 per cent over that period.

Default risk among home borrowers was most pronounced in areas where loans were taken out relatively recently, especially outer mortgage belt areas.

Despite rising credit risk, illion says many consumers increased discretionary spending during the second half of last year, especially “stay at home” purchases on takeaway food, digital goods and streaming services.

“There’s a lot more online and remote purchases, consumers are staying at home and getting their entertainment and food that way, as opposed to actually heading out,” Hasseldine said.

But illion warned this rise in discretionary spending at a time of increased credit delinquency, especially on consumer credit cards and home loans, pointed to a risky “consumer over-exuberance”.

“While interest rates and inflation have stabilised, and some consumers have started to increase their discretionary spending again, many households are still feeling the pinch of higher prices and dwindling savings,” Hasseldine said.

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