Canada: Payment Issues and Credit Card Debt on the Rise

Total consumer debt in Canada reached $2.4 trillion in Q3 2023, marking an increase of $80.9 billion compared to the same period last year, as reported by Equifax® Canada in its latest Market Pulse Consumer Credit Trends and Insights report. Despite the challenges posed by high interest rates and a slowing economy, mortgage debt saw a 1.7% increase compared to the second quarter, while non-mortgage debt growth was slightly lower at 1.2%.

The surge in non-mortgage debt was primarily attributed to credit cards, with total card balances reaching a record $113.4 billion in Q3 2023, reflecting a 16% increase from the previous year. Over 6 million new cards were opened in the last 12 months, showing a 13.7% increase from 2022.

Rebecca Oakes, Vice-President of Advanced Analytics at Equifax Canada, noted that the rise in credit card debt is driven by factors such as the increasing cost of living, higher interest rates, and the economic slowdown, placing a strain on household budgets.

Population growth remains a significant contributor to the rise in credit card balances, with over 1.3 million new cardholders compared to 12 months ago. However, the report suggests that increased financial strain may also be a contributing factor. The average balance of credit card holders increased to $4,119, up from $3,727 in the third quarter of 2022, surpassing pre-pandemic averages. Notably, consumers with credit scores below 620 experienced a substantial 13.9% increase in credit card balances this quarter compared to Q3 2022, up 9.4% from pre-pandemic levels.

Despite a 2.2% increase in average monthly credit card spending per consumer compared to the previous year, the average payment only increased by 1.7%.

The report also highlights a trend of missed payments on various credit products across the country, with the percentage of Canadians missing a payment on at least one product increasing from 1 in 31 during the pandemic to 1 in 25 in Q3 2023. Over 139,000 more consumers missed a payment in Q3 compared to 12 months ago.

Delinquencies are on the rise, especially in Ontario and British Columbia, with increasing rental costs cited as a contributing factor. Mortgage holders, particularly first-time homebuyers and those who renewed mortgages during peak interest rate periods over the last 12 months, are starting to miss payments. The overall non-mortgage balance delinquency rate stood at 1.2%, up 29.2% from Q3 2022.

Auto loans and unsecured lines of credit witnessed the most significant rebound in missed payments from pandemic lows, with 90+ day balance delinquency reaching 0.83% and 1.55%, respectively, exceeding 2019 levels.

Credit card delinquency rose by 15.8% during the third quarter, with consumers aged 36-55 experiencing the largest increase at 20.8%. Credit card payment behavior is considered a major indicator of financial stress, with the percentage of card users making only minimum payments rising by 3.4%, while the percentage paying their balance in full fell by 1.5%.

Despite some positive indicators, such as overall delinquency levels remaining below pre-pandemic levels, the report suggests that financial strain is increasing for some consumers.

Strains in the housing market are also evident, with new mortgage originations dropping by 9.5% in Q3 2023 compared to the same period last year. Affordability concerns and higher interest rates are likely deterring many Canadians from taking out new mortgages. Overall mortgage delinquencies remain below pre-pandemic levels, but regional differences are becoming more prominent.

The Canadian housing market’s continued slowdown may impact consumers renewing their mortgages in 2024, as population growth exceeds new housing volumes, preventing home prices from decreasing despite high interest rates. This, in turn, may slow the inflation drop and limit the ability to reduce interest rates quickly, posing challenges for consumers.

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