Survey report finds cash flow challenges, higher costs of living pushing households to seek greater flexibility
Canadians are doing what they need to as the cost of living continues to stretch their household budgets.
Despite inflation starting to ease, higher everyday expenses are demanding more of incomes and depleting savings, which can lead to cash flow problems.
But a new report from TransUnion shows that credit is being leveraged to increase consumers’ liquidity in the short term, although building up higher debt burdens could be risky especially if interest rates remain elevated.
The firm’s Q2 2023 Credit Industry Insights Report (CIIR) reveals that the rise in consumer demand for credit for liquidity purposes is rising consistently. The report is a measure of consumer credit health trends, focusing on demand, supply, consumer behaviour and performance. It rose 1.6 points year-over-year in June to 106. This was in line with pre-pandemic levels.
“Canadians, like the economy, remain persistently resilient,” said Matthew Fabian, director of financial services research and consulting at TransUnion in Canada. “However, the combined pressure of a high cost of living and elevated interest rates has created a payment shock, as the cost of debt has grown even heavier for some Canadian households. While some financial pressure has been offset through continued savings growth and strong employment, many Canadian consumers have accessed credit as a means to short-term liquidity.”
Outstanding debt
The share of Canadians having outstanding credit balances increased by 3.3% quarter-over-quarter but spiked almost 9% year-over-year for subprime borrowers.
Average balances also grew, led by card balances at just over $4,000, up 9% from prior year. Higher spend rates were the driver – the average consumer spent $2,100 on their cards in Q2 2023, up 1.5% from the same period of 2022. Subprime consumers spent $1,300, up 4%.
As spend increased, the amount that consumers paid against their card balances each month reduced by 2.8% year-over-year.
New credit applications were up 17% year-over-year and origination volumes grew 12% with lenders showing a greater risk appetite with subprime supply up 16% compared to 6% for the prime and better segments.
The report also highlights that total debt among Canadian households (including mortgages) rose 4.2% (+$94.8 billion) year-over-year and reached a total of $2.3 trillion in Q2 2023. Mortgages accounted for a significant share of this as existing home sales rebounded.
Although non-mortgage debt overall was down 7% year-over-year, credit card debt grew 14% with 80% of outstanding balances held by prime and better consumers.
With interest rates rising, minimum monthly payments spiked 34% for lines of credit, 15% for mortgages, and 11% for credit cards.
“This additional minimum payment has stressed some household finances, forcing consumers to make trade-offs in terms of how much they can allocate to cover additional debt,” Fabian explained. “The sudden and often unexpected rise in minimum payment is referred to as payment shock and can have dramatic consequences as some consumers are forced to decide how to allocate discretionary income and, in some cases, which bills or debt to pay.”
Gen Z payment struggles
TransUnion’s data shows that Canada’s youngest adults, those in Gen Z (born 1994-2010), are most likely to be struggling to keep up their credit payments.
This cohort recorded a 13-basis-point rise in delinquencies in the second quarter of 2023 and has seen a notable rise in new credit originations in recent quarters. Experiencing rate hikes for the first time, many Gen Zs will have suffered payment shock.
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Although Canadian consumers are showing resilience overall, there is concern that debt levels will cause further increases in delinquency rates as current macroeconomic conditions persist.
“Lenders have held steady in balancing their risk strategies in the current macroeconomic context, but this environment continues to place some Canadians under stress, as balances grow and minimum payments are higher than before,” Fabian explained. “Lenders should maintain a growth strategy that allows for financial inclusion, by focusing on resilient consumers and helping those vulnerable to economic shocks.”
