Canadian Consumers Turn to Credit for Liquidity
- Demand for credit continues to grow, likely fuelled by consumers seeking additional liquidity in response to high cost of living.
- Increased debt levels and higher interest rates contributed to higher minimum payments, adding pressure to already stressed consumers.
- Despite the historic resiliency of Canadian credit consumers, there are indications that some are struggling in this higher interest rate environment.
TransUnion today released the findings of its Q2 2023 Credit Industry Insights Report (CIIR), revealing a consistent rise in credit demand among Canadian consumers who are seeking additional financial flexibility due to the high cost of living, despite a slowdown in inflation1.
As part of the CIIR, TransUnion maps consumer credit market health with its Credit Industry Indicator (CII). The CII is a country-specific measure of consumer credit health trends, focusing on four pillars: demand, supply, consumer behaviour and performance. The CII for Q2 2023 in Canada was 106 in June 2023, up 1.6 points compared to the same period in 2022.
Graph 1: Canadian Credit Industry Indicatori
Source: TransUnion Canada consumer credit database.
(i) A lower CII number compared to the prior period represents a decline in credit health, while a higher number reflects an improvement. The CII number needs to be looked at in relation to the previous period(s) and not in isolation. In June 2023, the CII of 106 represented an improvement in credit health compared to the same month prior year (June 2022) and a slight increase in credit health compared to the prior quarter (December 2022).
The current CII levels are consistent with pre-pandemic levels. The slight year-over-year (YoY) increase was primarily driven by increased demand for credit, offset by continued deterioration in credit performance, which has been an ongoing trend for three consecutive months as interest rate pressures have affected many Canadian households.
“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.”
The number of Canadian consumers holding an outstanding credit balance increased 3.3% from Q1 2023. While the number of consumers taking on higher credit balances rose across all risk tiers, subprime consumers – the riskiest segment – experienced an 8.9% YoY growth rate.
Table 1: Number of Canadian Consumers with an Outstanding Credit Balance
Difference Between Q2'22 - Q2'23
|Low Risk: Above Prime|
|Moderate Risk: Near Prime + Prime|
|High Risk: Subprime|
While the number of consumers carrying a credit balance has grown, there has also been an increase in average balances per consumer across credit products. This increase in average balances can be largely attributed to higher spending habits and increased interest rates on variable-rate loans. Card balances rose the most, with the average consumer holding just over $4,000 in card balances – up 9% from prior year. This increase was driven by higher spend rates – the average consumer spent $2,100 on their cards2 in Q2 2023, up 1.5% from prior year, while below prime consumers spent $1,300, up 4% YoY. As spend increased, the amount that consumers paid against their card balances each month reduced by 2.8% YoY.
Table 2: Average Balance per Canadian Consumer
|Line of Credit|
Demand for new credit continued to grow. In Q2 2023, the volume of inquiries (applications) for new credit products grew 17% from prior year, a trend consistent across the borrower risk spectrum. Credit demand from prime and below* consumers grew 15%, and demand from better than prime consumers grew by 12%.
Increased consumer demand was matched with lender supply as origination volumes also grew 12% YoY. The risk appetite of lenders has increased, as below prime originations grew 16% while prime and better originations grew by 6%.
Higher interest rates drive up minimum payments, leading to signs of payment shock
The total debt of Canadian households (including mortgage and non-mortgage loan debt) increased 4.2% (+$94.8 billion) YoY and reached a total of $2.3 trillion in Q2 2023. This was driven primarily by mortgage loan debt, which saw a steady pace of growth for the fifth consecutive quarter at 9% YoY, as existing home sales rebounded.
While non-mortgage balances overall fell by 7% in Q2 2023, credit cards stood out as an exception, with balances growing 14% (+$12.9 billion) from prior year. The concentration of balances skewed toward lower risk segments, with over 80% of outstanding credit card debt held by prime and better consumers. Mortgage payments also continued to increase, as the average monthly installment on a mortgage in Canada grew 15% YoY to $2,071 per month.
Table 3: Change in Average Minimum Monthly Payments
Avg. Min. Payment Due
“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.”
Delinquency picture remains
While Canadian consumers remain generally resilient, with higher savings rates, worsening delinquencies were observed in some consumer and product segments.
The largest increase in delinquency, of 13 basis points (bps), was among Generation Z (born 1994 to 2010) consumers. This is likely because Generation Z borrowers are early in their careers and may not yet have the levels or stability of income that enables them to weather the current environment of higher inflation and interest rates as easily.
Additionally, Generation Z consumers have displayed higher growth rates in origination volumes than other generations over the past few quarters, as many of them enter the market for the first time. For some, this is the first time they have experienced a high interest rate environment, and they may be experiencing some payment shock.
The report also underscored differences between recent vintages (groups of borrowers who took out credit in the same specific time period). In comparing delinquency rates between borrowers who opened loans in 2020, 2021 and 2022, the report noted higher delinquencies in the more recent groups after 12 months, potentially due to higher interest rates and inflationary pressure.
Coming out of the pandemic, delinquency rates for subprime consumers increased by 37%, and by 56% for near prime consumers. These groups traditionally exhibit higher delinquency rates due to their riskier profiles, yet recent years have seen a rise in default rates among them compared to prime and above consumers, who are approaching pre-pandemic delinquency rates.
Unsecured credit products like cards and personal loans have seen more drastic increases in delinquency. Given that these loans are offered to consumers in higher risk tiers, are typically easier to obtain, and are unsecured forms of debt, they are generally prone to higher levels of delinquency. As originations to below prime consumers accelerate, these consumers may feel financial pressure in a high-rate environment. As long as the current macroeconomic conditions of elevated inflation and higher interest rates persist, a segment of consumers will likely continue to experience financial pressures.
“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.”
For more information about the Q2 2023 Credit Industry Insights Report, please click here.
1 Country Economic Forecast, Oxford Economics, July 17, 2023
2 Spend is a calculated metric derived by TransUnion using available credit data
*According to TransUnion CreditVision® risk score: Subprime = 300-639; Near prime = 640-719; Prime = 720-759; Prime plus = 760-799; Super prime = 800+
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