Research published this week by the University of Melbourne Centre for Corporate Law and Securities Regulation challenges some common perceptions about personal insolvency.

The headline numbers are disturbing enough – a 261% increase in personal insolvency between 1990 and 2008. But more interesting is the impact of easier credit, and the explosion in the use of credit and debit cards among Australian households.

According to the report written by Professor Ian Ramsay and Cameron Sim, excessive use of credit caused 13.3% of non-business related bankruptcies in 1997. By 2008, that figure had climbed dramatically with excessive use of credit accounting for 39.4% of non-business related bankruptcies.

Now, given the current economic climate, it is reasonable to expect that the rate of bankruptcy is likely to continue to rise, particularly as unemployment rises and more people struggle to meet financial commitments.

But the profile of people becoming personal insolvents is changing – they are more likely to be employed, older and have higher levels of personal and household income. Personal insolvency is definitely becoming more of a middle class phenomenon.

Since the global financial crisis started to bite, the good news is that the rate of growth in credit card debt has slowed significantly and households have been reducing debt. Perversely, that was not want the federal government wanted to happen as they were busily trying to stimulate consumer spending, but individuals sensibly took the chance to reduce personal debt.

But outstanding balances on credit and charge cards accruing interest, according to the Reserve Bank data, was $32.9 billion at the end of January this year. Rewind 12 months to January 2008, and the outstanding credit card balances accruing interest was $30.6 billion - so despite the global financial crisis credit card debt continues to climb. And despite the fact that money is pouring into bank term deposits, courtesy of the government guarantee and official interest rates falling steeply, interest rates on credit cards remain stubbornly high.

Mainstream rewards-based cards have an interest rate of 17.9% and cash advances are being charged interest at 20.9% on some leading cards.

Investors are understandably concerned about returns on their superannuation funds and the outlook for investment markets. But for many people, focusing on reducing the cost of servicing credit card debt could be a more effective strategy to improve their overall financial position. No-one can control market performance, but we can all control the amount we pay in fees to financial institutions – be they credit card companies, banks or fund managers.

PD