Canadians pile on non-mortgage debt: report

Low interest rates appear to be inspiring Canadians to rack up more debt – a trend that started up again even before the Bank of Canada’s recent rate cut - a new report shows.

The latest data from credit report agency TransUnion show the debt level per average consumer (not including mortgages) increased 2.3 per to $21,428 in the fourth quarter of 2014, compared to the same time a year earlier. The Bank of Canada cut its benchmark rate to 0.75 per cent in late January of this year.

Most of the gains were in lower interest-rate products such as instalment loans and lines of credit, TransUnion said. For instance, line-of-credit balances rose 4.4 per cent in the last year, to an average of $30,554 in the fourth quarter, while average instalment loan debt levels rose 2.4 per cent to $22,187.

Meantime, credit card balances - which often carry high interest rates, sometimes in the double digits - dropped more than 2 per cent to $3,659.

TransUnion says the overall trend of Canadians reducing debt has reversed from 2013.

“Canadians began to deleverage during the latter half of 2013, but our latest data show that consumers once again increased their balances throughout much of 2014,” said Jason Wang, TransUnion’s director of research and industry analysis in Canada.

He believes the trend may continue after the recent rate cut by the Bank of Canada, which has made borrowing more affordable.

The TransUnion report follows the release last week of Statistics Canada data showing Canada’s household debt-to-disposable income ratio rose to new high of 163.3 per cent in fourth quarter of 2014.

StatsCan said the average household held roughly $1.63 of credit market debt for every dollar of disposable income as of the end of last year, which sparked concerns that Canadians are relying too heavily on credit to manage their expenses.

The TransUnion report shows balances increased in cities where the economies are said to be improving from the impact of a lower dollar and cheaper oil prices, such as Toronto (up 3.95 per cent to $20,522), Vancouver (up 2.6 per cent to $25,077) and Montreal (up 2.66 per cent to $15,777).

Meantime, energy-rich cities such as Edmonton and Calgary – where a dramatic drop in oil prices has hurt the economy – have seen a slight drop in consumer balances. Still, their overall debt load was higher compared to the average consumer in other major cities. Calgary’s average balance was down 0.59 per cent to $28,751, while in Edmonton it was down 0.11 per cent to $24,651, the report shows.

“Both consumer debt and delinquency performance usually lag behind general economic conditions. We will monitor the market closely over the next few quarters to see just how big of an impact declining oil prices might have,” said Wang.

On a positive note, delinquency rates are down across Canada year-over-year.

TransUnion reports that account-level delinquency rates (which are those 90 days or more past due) dropped 2.6 per cent in the fourth quarter compared to the year before. The 90-day delinquency rate for line of credit accounts dropped by about 13 per cent to 0.74 per cent. Instalment loan delinquency rates dropped more than 12 per cent to 3.33 per cent in the October-December period.

“It’s clear that consumers are finding good opportunities in the line of credit and instalment loan areas, and they are preserving these relationships by making on-time payments,” said Wang.

TransUnion said lines of credit make up about 40 per cent of all non-mortgage debt balances.

“Most financial institutions are finding this to be a great area to lend, with declining delinquency levels a positive sign for both lenders and consumers,” he said.

Generation X had a slightly higher delinquency rate of 2.86 per cent, compared to the Millennial generation (2.76 per cent) and Baby Boomers (1.95 per cent). The report also notes that Millennials have a lower average limit on their credit cards of $8,070, compared to $16,584 for Gen X and $20,031 for Boomers.

People born before 1945, have the lowest 90-day delinquency rate of 1.2 per cent and the second-lowest average credit card limit, behind Millennials, of $16,337.