Youngest Borrowers Leading Canadian Consumer Credit Growth

As Canadian consumer debt continues to rise, TransUnion’s (NYSE: TRU) latest Canada Industry Insights Report found that Millennial and Gen Z borrowers are playing leading roles in this growth.

Average consumer non-mortgage debt balances rose 4.3% between Q4 2016 and Q4 2017 to close the year at $29,312. However, both Millennial (born 1980 to 1994) and Gen Z (born 1995 or later) consumers experienced significantly higher yearly percentage increases of 12.6% and 22.9%, respectively.

“As consumer debt continues to increase, it’s clear that the youngest generations are playing a critical role in the consumer credit market,” said Matt Fabian, director of research and industry analysis for TransUnion Canada. “Millennials are taking on additional balances as they reach significant life events that put pressure on their overall wallet—many of them are now supporting children, purchasing homes and acquiring additional vehicles. These costs may be financed through additional borrowing, so this growth in debt is not surprising.”

TransUnion also found that the high rate of balance growth among Gen Z, albeit from a much lower base level, is also expected. These younger consumers are entering the workforce for the first time and starting households, milestones which also increase demand for credit.

“It’s interesting that Gen Z is growing at a fast pace, but they also are the only generation that has shown increased delinquency rates on debt over the past year,” continued Fabian. “It could be they’re inexperienced in managing their credit obligations and demonstrating less discipline in making regular payments, which we tend to see reflected in their risk distribution which is typically non-prime compared to older generations. It will be important for these emerging consumers to learn the importance of maintaining their credit health. We have seen that credit education tools provided by financial institutions such as credit monitoring and score simulators can be very effective in building positive credit behaviours, reducing delinquency rates and increasing credit scores.”

TransUnion’s report found that, overall, 90 days or more past due consumer delinquency rates declined 23 basis points during 2017 to finish at 5.30%. While Gen Z experienced a 39-basis point increase in serious delinquency rates, Millennials saw a 69-basis point drop in delinquencies during 2017.

Comparing Consumer Credit Performance by Generation

The credit performance of the youngest generations is especially significant because they are increasingly taking a larger role in the overall Canadian credit marketplace. In fact, the share of all credit-active consumers in the Millennial and Gen Z age ranges combined has increased from 28.0% in Q4 2015 to 30.0% in Q4 2016, and again to 31.6% in Q4 2017—an increase of 12.2% in just the last two years. Conversely, between Q4 2015 and Q4 2017, the number of Baby Boomers (born 1946 to 1964) with credit declined 3.4%, while Gen X (born 1965 to 1979) dropped 1.6%.

“Millennials are already a significant part of the consumer credit dynamic in Canada. In fact, Millennials surpassed Gen X in market share for consumer credit at the end of 2016 and continued to outpace them in 2017,” said Fabian. “Of even greater anticipated consequence is Gen Z, even though they only comprise only 7% of all credit consumers in Canada currently. The share of Gen Z consumers will increase materially in the next few years as they are expected to grow from about 25% of the population today to 30% in a few years, with many obtaining a credit product for the first time. It will be important for lenders to understand the credit needs and preferences of this rapidly growing segment in order to effectively serve them in the coming years.”

Steady Credit Performance with an Eye on Interest Rates

The latest Industry Insights Report from TransUnion also found that the consumer credit market is performing well. The overall risk tier mix of Canadian consumers has improved, with 68% of consumers having Prime or better risk scores – a 2.3% increase over last year. The number of consumers with access to credit also has increased about 0.4% in the last year to 28.5 million.

Serious delinquency levels for all major credit products remain at relatively low levels, though recent Bank of Canada rate increases may be starting to impact some consumers.

Q4 2017 Canadian Consumer Credit Debt/Delinquency Picture

*Serious delinquency rates are 60 days or more past due for all credit products except for credit cards (90+ DPD)

“Most consumers will not be materially affected by the Bank of Canada rate increases. However, using our next-generation CreditVision credit data that identifies payment amount trends and behaviours, we have started to see an uptick in delinquency among pockets of consumers vulnerable to an interest rate shock,” said Fabian.

In 2017, TransUnion observed an increase in 90+ day delinquency in consumers who have typically made just their minimum monthly payments or slightly more. The percentage of such consumers rose 2.9% over the past year to approximately 120,000 consumers.

“These consumers are among the most vulnerable to interest rate increases—the fact that they are making monthly debt payments near the minimum due indicates that they may have less financial cushion to absorb monthly payment amount increases. While it’s a relatively small percentage of the overall consumer credit population, it is important for lenders to identify those consumers who are most at risk from interest rate increases, and to incorporate these insights into their customer and portfolio management strategies,” Fabian added.

Regional Divide

While most parts of Canada have seen relatively low delinquency levels over the course of the last three years, two provinces proved to be outliers – Alberta and Saskatchewan. The massive drop in oil prices between 2014 and 2016 negatively impacted consumer credit performance in Alberta and Saskatchewan, but these risks, too, may finally be subsiding.

“Economic conditions have been improving for a few quarters in these two oil provinces, but we had not seen similar improvements in consumer credit behaviour,” said Fabian. “We’re beginning to see that now, as delinquency rates are finally beginning to drop on a yearly basis while debt level increases have slowed in these provinces.”

The average non-mortgage debt balance per consumer in Alberta and Saskatchewan grew below the national average, increasing 1.7% and 2.6%, respectively. Although the actual dollar balances are still above the national average, TransUnion observed that this growth trend has slowed. Also reassuring is that the 90+ day delinquency rate dropped in both provinces (down 4 bps in Alberta and down 24 bps in Saskatchewan).

Ontario saw the largest yearly increase in average consumer non-mortgage debt at 6.2%, to $30,191. “This growth appears to be driven by a couple of factors, including auto finance where Ontario consumers recorded the highest percentage increases in both volume and average size of auto loans. We also saw material increases in lines of credit and mortgages, likely due to increased home equity values, especially in the Greater Toronto Area,” added Fabian.

Although Quebec consumers remain the least indebted, with average non-mortgage consumer debt at $22.543, the province did see an increase of 3.1% year over year, marking the third consecutive quarter where balances grew. Serious delinquency rates in Quebec remain very low, and well below the national average at 4.3% (a 7 bps yearly drop).

More information about the Q4 2017 TransUnion Canada Industry Insights Report, including details about a variety of credit products, can be found here. Please visit the following website to register for TransUnion's Q4 2017 Industry Insights Webinar scheduled for March 7 at 2 p.m. ET.

About the TransUnion Canada Industry Insights Report

TransUnion’s Canada Industry Insights Report is an in-depth, full population-based solution that provides statistical information every quarter from TransUnion’s national consumer credit database, aggregated across virtually every active credit file on record. Each file contains hundreds of credit variables that illustrate consumer credit usage and performance. By leveraging the Industry Insights Report, institutions across a variety of industries can analyze market dynamics over an entire business cycle, helping to understand consumer behaviour over time and across different geographic locations throughout Canada. Businesses can access more details about and subscribe to the Industry Insights Report at http://www.transunioninsights.ca/IIR/.

About TransUnion (NYSE: TRU)Information is a powerful thing. At TransUnion, we realize that. We are dedicated to finding innovative ways information can be used to help individuals make better and smarter decisions. We help uncover unique stories, trends and insights behind each data point, using historical information as well as alternative data sources. This allows a variety of markets and businesses to better manage risk and consumers to better manage their credit, personal information and identity. Today, TransUnion reaches consumers and businesses in more than 30 countries around the world on five continents. Based in Burlington, Ontario, TransUnion provides local service and support throughout Canada. Through the power of information, TransUnion is working to build stronger economies and families and safer communities worldwide. We call this Information for Good. Visit www.transunion.ca to learn more.