Canadians racked up $100 billion in credit card debt for first time ever and they’re not done adding to it

Canadians will likely see a slight increase in debt and delinquencies next year, particularly in Western provinces hit by downturns in the oil and farming industries, according to a new report by a consumer credit reporting agency.

The average Canadian’s non-mortgage debt may increase by 1 per cent to $31,531 by the end of 2020, New York Stock Exchange-listed TransUnion Co. forecast. Delinquency rates may fall to 5.41 per cent this year from 5.54 per cent at the end of September before increasing to 5.44 per cent by the end of next year, the data showed.

TransUnion analyses consumer credit across Canada for its Industry Insights Report geared to retailers, banks, lenders and other credit card issuers. The estimated increase in delinquency rates is an early warning sign of a potentially weakening market for issuing credit, TransUnion said. It also noted the “significant milestone” of outstanding credit card balances in Canada exceeding $100 billion in the third quarter for the first time.

“While the Canadian economy has slowed, key measures such as inflation and unemployment remain healthy and continue to bolster the market,” Matt Fabian, director of financial services research and consulting for TransUnion Canada, said in a statement.

“However, a potential slowdown in the Canadian economy, combined with soft wage growth, heightened global economic uncertainty and potential further interest rate increases, may cause some challenges,” Fabian said.

Credit card delinquencies may rise to 2.9 per cent by the end of next year from 2.8 per cent at the end of September, TransUnion said. The average credit card balance may increase to $4,465 by 2020 end from $4,240 at the end of September, it said.

“In addition to being used to facilitate retail purchases, credit cards are often used by consumers to finance essential living expenses; the continued increase in card balances could be a sign of the growing pressure on personal finances,” the agency said.

TransUnion expects increased delinquency rates on credit cards in 2020 to rise, noting that consumers often have a payment hierarchy around which debt payments they make and in what order.

The continued increase in card balances could be a sign of the growing pressure on personal financesTransUnion 

“These analyses have shown that, for financially distressed Canadian consumers with credit cards, auto loans and mortgages in their wallets, the credit card payments are generally the first that will be missed, as consumers prefer to keep payments on auto loans and mortgages in good standing if they are forced to choose,” the agency said.

Continued struggles in the energy sector and the impact of trade restrictions on agricultural producers will contribute to weakened economies in the Prairies that could spike delinquency rates by 50 basis points, the agency said.

“Typically, as these economic shock events occur, we tend to see some unemployment increases followed by a rise in delinquency as incomes and capacity to service debt become constrained,” Fabian said.

The average mortgage balance may rise to $285,738 by the end of next year from $273,276 at the end of September, TransUnion forecast. Delinquencies might uptick to 0.51 per cent by the end of 2020 from 0.45 per cent at Sept. 30, though the amount is low and stable, it said.

Canada’s mortgage market is bouncing back from rules enacted in 2018 to tighten qualifications for home-buying, with new mortgages up 4.5 per cent in the third quarter compared to a year earlier, the agency reported.

“As lenders have gotten acclimated to these new rules, other positive market factors, including lower long-term interest rates and positive housing sales and demand conditions, have contributed,” the agency said. “TransUnion forecasts this growth to continue as demand increases and the market further acclimatizes to the new rules.”

Source: The Financial Post