Coming as no surprise to many, given the challenging state of our economy, more Canadian consumers are turning to credit.
Today, TransUnion released the findings of its Canada Q3 2022 Credit Industry Insights Report (CIIR), which shows that credit participation reached a record high. During the third quarter of the year, 27.9M Canadians having active credit products with a total outstanding balance of $2.29T. This marks a year-over-year (YoY) increase of 7.9%, on a three-year compound annual growth rate of +6.4%.
As part of the report, TransUnion maps consumer credit market health with its Credit Industry Indicator (CII), which rose 3.5 points YoY to 105.6 in September 2022, staying relatively steady following the Q2 2022 score of 103.8, after reaching a high of 110.8 in April this year.
“Rising CII levels generally indicate an improvement in the overall activity and health of the consumer credit market, which in the most recent quarter was primarily propelled by the strong credit activity due to balance growth and continued higher spend levels,” said Matt Fabian, director of financial services research and consulting at TransUnion in Canada. “Credit performance remains relatively healthy compared to pre-pandemic levels, although the CII was offset somewhat by slowing credit demand in a high interest rate environment, with lenders also being more cautious in anticipation of continued macroeconomic headwinds."
Also not surprising, the growth in the number of consumers carrying a balance was the highest among subprime consumers -- those with higher risk of default -- with the number of consumers in this segment growing by 7.2% YoY in Q3, although their share of balances remained relatively low compared to other consumer segments. The report highlights how this marks a re-engagement with credit among these consumers after a decline during the pandemic, something that was likely led by the effects of inflation, along with lenders increasing their participation in the subprime consumer space.
Meanwhile, credit participation increased mostly amongst those in Generation Z (born between 1995 and 2010) with a YoY increase of 20.9% as more Gen Z consumers entered the credit market and this cohort expanded the use of different products. Credit participation increased 3.6% YoY among Millennials (born between 1981 and 1994), whose non-mortgage balances grew the fastest at 13.3% YoY. Credit participation among Baby Boomers (born between 1946 and 1964) and the Silent Generation (born between 1928 and 1945) declined by -1.0% and -6.6%, respectively.
Overall, non-mortgage debt increased by 2% YoY, driven by increased credit card and line of credit balances, says TransUnion. Sky-high inflation and a higher cost of living eroded both disposable income and the savings rate, leading to an increased reliance on credit for many Canadians. Growth in the minimum required payment was led by mortgages, as the average consumer’s monthly mortgage payment increased by 9.3%, driven by a combination of perpetual rate increases and relentlessly high home prices. Credit card minimum payments increased by 7.4% driven by increased utilization and balances. Auto loans increased by 2.6% as vehicle purchase prices also continued to increase.
“Inflationary pressure is likely contributing to higher spend levels relative to income as cost of living increases have eroded Canadians’ disposable income and savings rates,” Fabian said. “They are increasingly reliant on credit to bridge that gap. Additionally, an increasing interest rate environment continues to increase the cost of certain debt which puts additional pressure on some consumers.”
The ongoing volatility creates shifts in consumer behaviour, says TransUnion. A recent study conducted by the company looked at more than 21M Canadian credit consumers over a 12 month period to observe consumer credit behaviour through the pandemic. The study followed consumers through two very different time periods -- 2019 and 2021 -- to identify differences in credit utilization and balance behaviour pre- and during the pandemic and revealed a number of trends.
While households accumulated a record amount of savings during the peak of the pandemic -- mainly because there was nothing to do -- the gains were evenly distributed. “As savings have subsequently deteriorated in the current adverse macroeconomic environment, a growing inequality in household wealth is driving different responses,” reads the report.
TransUnion's analysis revealed that an equal number of consumers were leveraging (increasing their debt balances by at least 20%) as were deleveraging (shrinking their balances by 20%). During the pandemic, just over 50% of deleveraging consumers reduced their pre-pandemic balances by over half.
Those building their balances were doing so across primarily unsecured credit products -- credit card, line of credit and personal loan -- with 70% of these leveraging consumers being scored above prime (i.e. lower risk). Lenders were increasing limits on credit products over the same 12 month period to these consumers, as their demand for credit increased.
The consumers that were deleveraging their credit were primarily doing so by paying down auto loans, mortgages and home equity loans.
“Deleveraging activity reduces overall debt, but it also lowers consumption and spending, which can limit credit growth in an economy if it happens during an economic downturn or recession. During a downturn, consumers prioritize what they’re spending money on. As lenders prepare for the next possible downturn, understanding consumers’ financial durability becomes important in identifying growth opportunities,” Fabian explained.
Naturally, inflation remains a concern for Canadians. TransUnion's Canada’s Q3 Consumer Pulse survey to over 1,200 Canadian consumers indicates that inflation concerns continued as households shifted their behaviours and reduced spending to potentially cope with rising costs. Inflation was a growing concern: 69% of households cited inflation as their biggest or second biggest concern affecting household finances in the next six months. Furthermore, 55% of households indicated their incomes weren’t keeping up with inflation. When it comes to a potential recession, Canadians said they’re shifting some behaviours to prepare by reducing spending (68%), building up savings (32%) or paying down debt (31%).
With the return to societal normalcy, Canada’s increased credit activity approaches pre-pandemic norms, according to TransUnion. Delinquency levels, led primarily by installment loans and credit cards where serious delinquency was up by 12 bps and 13 bps respectively, have been trending towards pre-pandemic levels. The recent surge in below prime originations (an increase of +11% YoY in Q2 2022 ) -- the latest data available for originations due to a reporting lag -- is likely a factor in this trend. TransUnion says it's important to note that, while delinquency is generally trending up, delinquency rates in general are still below pre-pandemic levels, apart from personal loans.
“The Canadian credit market remained healthy and active during Q3 2022, despite the inflationary pressures,” said Fabian. “The economic outlook remains challenging, with high inflation, rising interest rates and stock market volatility negatively impacting consumers; at the same time, the strong employment market has provided income stability. While some increases in delinquency rates are still expected in the coming months, a sound jobs picture and Canadian consumers’ resilience suggests that there are growth opportunities in the credit market among the various economic challenges.”