TransUnion reports growing credit card debt as Canadians struggle with inflation and high interest rates
A report by TransUnion suggests that more Canadians are seeing their credit card balances increase as the cost-of-living crisis and higher interest rates strain household budgets.
According to BNN Bloomberg, the report states that the number of Canadians paying only the minimum monthly amount on their credit cards rose eight basis points to 1.3 percent in the first quarter compared with last year.
Matthew Fabian, director of financial services research at TransUnion Canada, explains that many household incomes are not keeping up with inflation and higher interest rates, leading to greater reliance on credit.
“Consumers that have had significant increases in their mortgage payment have made that deliberate trade-off to pay less on their credit card and in some cases, they're missing their payment,” says Fabian.
“We've seen a higher delinquency rate in credit cards for those consumers that have mortgages than traditional credit card consumers.”
Total consumer debt in Canada reached $2.38tn in the first quarter, compared with $2.32tn in the same quarter last year, showing a slight decrease from a record $2.4tn in the fourth quarter.
According to the report, 31.8 million Canadians had one or more credit products in the first quarter, up 3.75 percent year-over-year. This increase was mainly driven by newcomers and Gen Z signing up for their first credit products.
The report highlights a 30 percent surge in outstanding credit card balances for Gen Z compared with the previous year.
“The younger generation is only getting access to credit for the very first time in their life,” notes Fabian. “They're still learning how to use it; they're still learning what it means to pay your monthly obligations.”
Millennials, meanwhile, hold the largest portion of debt in the country—about 38 percent of all debt—likely due to their higher credit needs as they age, the report indicates.
“They're in the life stage where they're probably having children, getting houses and have auto loans,” Fabian explains. “The structure of the debt has shifted where 10 years ago, the majority of them would have had credit cards and car loans.”
Fabian expresses confidence that households will not fall behind on their mortgage payments because of the strict screening process established by the banking watchdog to qualify for a mortgage.
He also notes that cash-strapped consumers typically prioritize paying their mortgage over other credit products like auto loans or credit cards.
Despite concerns about missed payments among vulnerable populations, Fabian observes, “We're still seeing pretty decent resiliency in the Canadian consumer base, especially when you look at how quickly it's grown with Gen Z and the volume of credit participation.”
He adds that anticipated interest rate cuts, potentially as early as June, could ease the burden on households over time.
“Our expectation is that the market will start to correct back to normal,” Fabian says.
