Canadians increasingly relying on credit cards as cost of living soars: Equifax
More Canadians are relying on their credit cards to fund daily expenses as the cost of nearly every aspect of life becomes more expensive, according to Equifax Canada.
New data from the credit reporting firm found credit card utilization rose for the sixth straight quarter and the average credit card balance was sitting at a record high of $2,121 as of the end of September.
"We certainly know from the economic conditions that the pressures are coming from all directions," Julie Kuzmic, senior compliance officer at Equifax Canada, said in a phone interview with Yahoo Finance Canada.
"Canadian consumers are facing increasing interest rates for their mortgage payments, that also will affect interest rates on lines of credit that people may have, the inflation circumstances are really affecting grocery bills, and then there's the price of gas, which many people are affected by as well. So it really does feel like a perfect storm."
The survey found only half of Canadians reported feeling comfortable with their personal economic outlook, down from 61 per cent last year.
One of the worst financial mistakes you can make is to rely on credit and only make the minimum payment to supplement your income.Laurie Campbell, Bromwich+Smith
The total non-mortgage debt per consumer was $21,188 on average in the third quarter, levels not seen since the first quarter of 2020, according to Equifax.
The survey was conducted using Leger's online panel and polled 1,006 individuals through mid-October.
Fifty-two per cent of respondents were concerned about being able to keep up with monthly bills such as rent, hydro and insurance. The older the respondent, the more likely they were to be worried about making bill payments on time, the survey said.
To keep a lid on grocery bills, many say they were using coupons or shopping for sale items, while others were buying less food altogether.
There were provincial differences in how much of a financial burden Canadians were feeling. Those in British Columbia, Quebec and Atlantic Canada were more likely to report anxiety over their debt loads and job security, while Albertans were the least concerned about these issues.
Alternatives to credit cards
"It's no surprise that this report is supporting the fact that Canadians are using credit cards to bridge the gap between income and expenses," Laurie Campbell, director of client financial wellness at Bromwich+Smith, said via phone.
"I truly believe that inflation has rocked people to their core, along with the fact that interest rates have climbed. And those individuals that could have relied on some equity in their homes are now facing the reality of decreased housing value and an increased debt load."
Credit cards are some of the most expensive types of debt an individual can take on, with many cards having interest rates of roughly 19 per cent to as high as 29 per cent.
"You can imagine if you're only paying the minimum payment, how much interest you're going to pay," Campbell said.
"One of the worst financial mistakes you can make is to rely on credit and only make the minimum payment to supplement your income. It's a recipe for disaster and unfortunately it's not sustainable."
If an individual really needs to rely on debt to bridge the gap in their budget, Campbell says a line of credit could be a better option since it typically has lower interest rates compared to credit cards. However, cutting back expenses and living within your means should be the ultimate goal, she says.
"At the end of the day, if you're not living within your means, these things will explode. So the reality of it is you need to take a look at your budget and you need to find out where you can cut back," she said.
That might look like getting a second job or taking transit to work instead of driving, she adds.
Repairing your credit score
As consumers adjust to the new reality of high inflation and rework their budgets, those looking to repair their credit score can start by making sure bill payments are made on time.
"That is a very important factor in credit score calculations," Equifax's Kuzmic said.
Credit scores and how they are calculated are often misunderstood though. Lenders could use multiple credit scores when evaluating a person's credit application, she adds.
"I always like to remind people to focus on the information that is in your credit report, because all the score versions are based on that information in your credit report. So it's critical to make sure that it's all accurate," she said.
A score of 750 out of 900 is the threshold that's considered good. Lenders also don't tend to distinguish between individuals that are within that good credit range, meaning someone that has a score of 780 will be on the same playing field as someone else with an 880 score, Kuzmic explains.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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