In this literature review we detail current knowledge about how people decide on personal debt in Australia, with particular reference to low income families. These readings form the starting point of our study of Families at Risk Deciding on Personal Debt. The aim of our study is to understand financial decision-making so that we can address what needs to be done to empower consumers and alleviate debt problems amongst the most vulnerable families in Australia. This literature review on personal credit and debt in Australia complements the accompanying literature review on the theoretical frameworks and literature around the study of personal debt and credit. These literature reviews do not include a detailed discussion of consumer education as this will form the subject of a separate report.

The literature on personal debt in Australia is sourced from consumer bodies, regulators and academia. This review has benefited from the input of consumer organisations and hence brings together literature that is not always accessible. All agree that more research is needed, particularly on financial decision-making. Our literature survey shows the main gap lies in the study of the social and cultural dimensions of debt, credit and decision-making. With the inclusion of the social and cultural perspectives, financial decision making no longer remains an individual, economic issue. There is a further need to measure the impact of these cultural factors so that they can be part of models of consumer behaviour that are beginning to underlie strategies regarding financial literacy, provision of credit and regulation.

We found it useful to distinguish between the terms “debt” and “credit”. We refer to “debt” as financial distress or constraint because of borrowings, whereas “credit” refers to borrowings. This distinction is important, for Reserve Bank of Australia studies show that household credit has increased in Australia. However household debt when measured as the percentage of financially constrained households, has remained the same or decreased. It has to be noted that the percentage of households with debt is highest in the 40 percent of households with the lowest incomes. This is detailed in section two.

In section three, we address the literature on the provision of credit to the poor. We place credit within the frameworks of financial inclusion and exclusion. The poor find it difficult to get small loans in a way that is affordable, convenient, fast, understandable and maintains their dignity. Industry practices continue to encourage overcommitment among the poor.

In section four, we show how "truth-in-lending" is the basis of consumer credit legislation in Australia. Consumer literature and reviews of the Uniform Consumer Credit Code suggest that information has become more accessible to consumers. However consumer behaviour differs according to the credit markets. Consumers compare information on housing and personal loans more than they do for credit cards and linked credit. Hence, regulation has its limits and needs to work with other initiatives.

In section five we turn to the research on financial literacy. The concept of financial literacy is broader than previous approaches that saw a linear approach between information given and decisions made. It includes the psychological dimensions of decision-making and also notes cultural differences in attitudes to debt. However throughout the discussions, money and debt are seen as wholly economic phenomena. The consumer is rightly at the centre of the model. But it is always the consumer as an individual, rather than the consumer as a member of a household or family. The useful discussion about financial literacy would be strengthened if it included the growing body of literature on the social and cultural meanings of money.

Contents
List of Figures
List of Tables

1. Overview
1.1 Extent of literature on personal debt and credit in Australia
1.2 Dimensions of personal debt and credit in Australia
1.3 Credit to the poor
1.4 Regulation of credit
1.5 Financial literacy
1.6 Measures to address issues of household debt

2. Dimensions of personal debt and credit in Australia

2.1 Household debt and credit
2.2 Increase in household credit
2.3 Personal credit is a small but growing portion of household credit
2.4 Level of household debt is lower over the last decade

3. Credit to the poor

3.1 Access to credit and financial exclusion
3.2 Community organisations working with mainstream providers
3.3 Interest free loans
3.4 Microfinance
3.5 Payday lending
3.6 Book Up
3.7 Lack of community development finance institutions (CDFI)

4. Regulation of credit

4.1 Truth in lending
4.2 Reviews of the Uniform Consumer Credit Code
4.3 Regulation of financial reporting

5. Financial literacy

5.1 The ANZ study
5.2 Australian consumers and money
5.3 Consumer bodies react
5.4 A Cultural Consumer Behaviour Model
5.4.1 Cross cultural issues

5.5 Consumer education and financial literacy
5.6 Curbing exploitative practices by industry
6. Conclusion: Measures to address household debt

Acknowledgments
References

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