Rising Living Costs Push Credit Card Debt to Average of $4000 in Canada

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Rising living costs in Canada are pushing more Canadians to increasingly rely on credit, with the average credit card balance reaching $4,000, as per a recent report from TransUnion.

The TransUnion Q2 2023 Credit Industry Insights Report reveals a 4.2% increase—that’s $94.8 billion—in Canadian household debt from the previous year, bringing the total debt for Canadians to $2.34 trillion.

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The escalation, the report suggests, is primarily driven by mortgage loan debt, which has shown a steady growth pace for the fifth consecutive quarter—a nine per cent year-over-year increase—as existing home sales rebounded.

On probing Canadians’ financial management and debt handling, TransUnion analyzed demand, supply, consumer behaviour and performance for its Credit Industry Indicator metric. The second quarter of 2023 saw Canada achieve a Credit Industry Indicator score of 106, marking a 1.6-point increase from the same period in 2022.

However, the current Credit Industry Indicator levels seem to be at par with pre-pandemic levels, with a slight year-over-year increase prompted by increased credit demand.

Elevated debt levels and surging interest rates have resulted in increased minimum payments, according to the report, putting further pressure on already financially beleaguered consumers.

The documentation underlines that although Canadian credit consumers have historically shown resilience, indicators now point to some individuals, particularly Gen Z in their early professional stage, struggling in this heightened interest rate environment.

“Like the economy, Canadians remain steadfastly resilient,” says Matthew Fabian, director of financial services research and consulting at TransUnion in Canada. “However, the combined load of a high cost of living and elevated interest rates has led to a payment shock; the cost of debt grows weightier for some Canadian households. While persistent saving growth and strong employment have offset some financial pressure, numerous Canadian consumers have resorted to credit as a brief liquidity solution.”

Data reveals a 3.3 per cent increase in the number of Canadians with credit card debt in the first quarter of 2023. Consumers from all risk categories are gathering more debt—with the riskiest group, subprime consumers with low credit scores, witnessing an 8.9 per cent year-on-year surge in their debt levels.

The report notes a nine percent increase in average consumer balances across credit products, crossing $4,000, primarily due to inflated spending habits. The average consumer spent $2,100 on their cards in the second quarter of 2023—a 1.5% increase from the previous year. Even consumers with lower credit scores increased their spending to $1,300, a four per cent year-on-year rise. However, as expenditures increased, the amount consumers paid towards their card balances each month declined by 2.8 per cent year-on-year.

Moreover, the demand for new credit cards continued to escalate, with a 17 per cent increase in the second quarter of 2023 compared to the previous year. Specifically, demand from prime and below consumers grew by 15 per cent, while above-prime consumers experienced a 12 per cent surge in credit demand.

The report indicated that lenders responded by seeing a 12 per cent year-on-year enlargement in origination volumes, signifying an increase in risk appetite among lenders—with below-prime originations growing by 16 per cent and prime and better originations increasing by six per cent.

“This increased minimum payment has put a strain on some household finances, forcing consumers to compromise on how much they can allocate to cover additional debt,” explains Fabian. “The abrupt and often unexpected increase in minimum payment, referred to as payment shock, could result in dramatic implications as some consumers are forced to decide on allocating discretionary income and, in some cases, on which bills or debt to pay.”