Credit Health in Canada Remains Steady Despite High Interest Rate and Inflation Environment
- Amidst an economic environment of rising interest rates and high inflation, consumers continued to look to credit as a means to help stave off financial pressures during the fourth quarter of 2022.
- High credit activity was driven by new originations and consumer-level balance growth.
- As credit activity increased, performance has deteriorated, suggesting that lenders should seek early warning signals to predict and avoid delinquencies.
TransUnion today released the findings of its Canada Q4 2022 Credit Industry Insights Report (CIIR), which shows that the Canadian credit market continues to expand against an uncertain economic backdrop, with consumers taking on additional credit and lenders continuing to grow.
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 Q4 of 2022 in Canada rose four points year-over-year (YoY) in December 2022, reaching 105 and remaining in the same range as before the COVID-19 pandemic.
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 December 2022, the CII of 105 represented an improvement in credit health compared to the same month prior year (December 2021) and a slight increase in credit health compared to the prior quarter (September 2022).
The YoY increase in the CII was primarily driven by higher credit participation – the proportion of consumers utilizing credit - as well as to the growth in consumer balances, although it was slightly offset by recent declines in inquiries and retail spending, as well as increases in delinquency levels across products.
More and more borrowers are looking to a range of credit products to cope with their financial pressures and better position themselves for the evolving financial landscape. Credit participation increased across all provinces, led by Ontario which saw a 3.2% increase in the number of credit-active consumers. Total outstanding balances also reached a new record high for the second consecutive quarter, increasing 6.8% year-over-year (YoY) to $2.3 trillion. Increases in average credit card and mortgage balances per consumer – up 7.2% and 4.5% YoY, respectively – largely drove this balance growth.
Overall, credit adoption is growing the fastest among younger consumers, with Gen Z consumers, born in 1995 or after, being the fastest growing cohort relative to credit participation, while also having the highest growth in average non-mortgage balances. Much of the growth in Gen Z is attributable to more of these consumers reaching credit-eligible adult age each year. However, Millennials also continue to see growth in participation, with nearly 4% YoY growth in the number of credit-active borrowers.
Table 1: Credit participation across generations
YoY growth in credit-active consumers
Average non-mortgage balance per consumer
Gen Z (1995-Present)
Gen X (1965-1979)
Baby Boomers (1946-1964)
Silent/Pre War (1912-1945)
“We are observing increased credit usage, as some consumers look to credit as a means to help stave off financial pressures. Additionally there’s been some deterioration in credit performance; however: overall credit market health remains at pre-pandemic levels,” said Matt Fabian, director of financial services research and consulting at TransUnion in Canada.
“Lenders are beginning to increase their provision for credit losses, but they’re not stopping their growth trajectory since delinquency levels are still below what they were prior to 2020. Canada is still in a good environment from a performance perspective, but lenders would do well to monitor trends closely,” he added.
Originations grow as consumers seek access to credit and liquidity
Acquisition volumes, or the number of new accounts opened, increased by 6.2% YoY in Q3 2022 across all products, with card originations having increased by 23% over that period. Originations grew the most in higher-risk tiers – below prime* originations grew by 7% while prime and better risk consumers accounted for 2% YoY origination growth.
Originations were largely driven by younger consumers seeking access to new or additional credit, with originations among Gen Z growing by 20.1% YoY, and by 9.9% among Millennials. This mirrors the most recent Canada Consumer Pulse Survey, which recorded that 18% of Gen Z consumers and 19% of Millennial consumers plan to increase their credit usage.
Bankcard originations increased to 1.7 million in Q3 2022, which represents growth of 22.5% YoY. With this growth, 26 million Canadians have access to credit cards.
Mortgage originations, which had been a driver of volume through 2022, continued declining, by 18.3% YoY. The demand for mortgage refinancing has continued to decline with the recent interest rate increases, as most consumers who were eligible for refinancing have already taken the opportunity to do so.
Higher interest rates, along with overall higher credit balances, have driven higher minimum payment obligations. The average credit consumer with a balance saw their minimum monthly payments increase by 10% YoY to $584, driven predominantly by increased payments due across credit card, lines of credit and mortgages.
The property price correction that started in early 2022 is deepening, with prices already down 11.5% from February last year. Affordability, which is a major concern among Canadians and government, may be set to improve in 2023 as mortgage rates peak and house prices continue to decline. However, the increase in minimum payments due for mortgages, as a result of interest rate increases, has put Canadian homeowners under even more pressure, with mortgage payments increasing, on average, by 17% YoY.
Table 2: Increase in average monthly payments on credit products
Average Minimum Monthly Payment Required Q4 2022
YoY % Increase
Line of Credit
Lenders can turn to early warning signals to predict and prevent delinquencies
Canadians were generally resilient through the pandemic, and demonstrated healthy credit performance trends. However the current high interest rate, high inflation environment has many facing financial stress due to payment shocks arising from these macro changes.
During Q4 of 2022, overall consumer-level serious delinquency (90 days or more past due) increased 11 bps YoY to 1.51%. While overall delinquency levels remain below pre-pandemic levels, consumer-level delinquency has increased steadily over the last three quarters, with the most significant increases in recent months seen in unsecured credit products.
While most efforts in portfolio management focus on optimizing collections after delinquency, lenders could focus more on borrowers in pre-delinquency states at risk of becoming delinquent, to empower consumers and prepare less costly recovery strategies. Using a robust data framework to identify at-risk consumers at an early stage, and respond with appropriate account management strategies, can help prevent delinquencies and build loyalty among customers.
To deliver the tools necessary for effective risk management, TransUnion conducted a study to better understand first-time defaulting consumers, and clearly distinguish distracted consumers from struggling consumers.
TransUnion’s 2022 Early Warning Signals (EWS) study defined first-time defaulters (FTD) as consumers who have defaulted (became 30+ days past due on a credit payment) for the first time over the last 24 months of their credit history, meaning they were current on all their credit payment obligations in the two years prior to their default.
Among FTD consumers, the study identified distracted payment behaviour as a consumer missing a payment but for non-economic reasons, such as being away on vacation, moving to a new address and not receiving bills, or even a major life event such as having a baby. A distracted consumer is defined as a FTD that did not go any deeper into delinquency over the subsequent, whereas a struggling consumer rolled into more severe delinquency stage over the next six months.
In contrast, struggling payment behaviour is defined as FTD consumers who subsequently roll into a more serious delinquency stages (e.g., progressing from 30 to 60 days past due). Struggling consumers likely miss payments due to economic difficulties such as losing a job, a slowdown in a business owned by the consumer, or having other financial obligations during a time of financial pressure.
The study, conducted using credit data between April 2019 and June 2022, found that younger, higher risk consumers with lower incomes and less credit experience have a higher probability of becoming struggling consumers. However, a portion of prime and above borrowers are also struggling, making it key for lenders to identify them.
The study also found that consumers building balances are more likely to default, making this behaviour a leading indicator of delinquent and struggling consumers. A high utilization rate is also a good indicator for predicting struggling consumers, who also tend to have less mature portfolios, with a higher share of accounts opened in the last two years. In addition, the study found that consumers who pay above the minimum payment due amount are less likely to become delinquent and struggling.
Leveraging enhanced credit attributes, an EWS predicts the likelihood of a FTD rolling into more serious delinquency on their payments in the following six months. The model can accurately predict 48% of struggling FTD consumers in the top decile of all borrowers. Of FTDs, 40% tend to be struggling consumers who do not cure on their own, implying that lenders need to employ proactive collection strategies.
For example, in Q4 2021, 21.5 million credit card consumers in Canada had not missed payments over the previous 24 months. By applying CreditVision® scores, 15% of those consumers were assessed to be high risk with below prime* credit scores. By applying EWS scores, 48% of those high risk consumers were predicted to be struggling, and 4.5% of them rolled into serious delinquency, with total credit limits of $356 million.
“Lenders should prioritize struggling borrowers, as their level of average balances has recently exceed pre-pandemic levels,” Fabian said. “The fact that most consumers who default for the first time become struggling borrowers is cause for concern, and is a priority for lenders to manage, particularly since pandemic-driven payment relief programs have ended as a source of liquidity for borrowers.”
For more information about the Q4 2022 Credit Industry Insights Report, please click here.
*According to TransUnion VantageScore® 3.0, score ranges are: Subprime 300 – 600, Near Prime 601 – 657, Prime 658 – 719, Above Prime 720 – 780, and Super Prime 781 – 850.
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