The borrowing binge: Consumer debt hits
eight-year high
ROMA LUCIW
The Globe and Mail
Despite repeated warnings, Canadians have
returned to their borrowing ways, pushing consumer debt levels to a new record
high.
A report released Thursday by TransUnion
shows that the average Canadian’s non-mortgage debt reached $26,221 in the
second quarter of 2012, up $192 from the previous quarter. The $26,221 amount
is the highest per person debt level since the credit bureau started tracking
the data in 2004.
The increase is noteworthy because it is
the second consecutive quarter of accelerated growth in personal debt levels,
when comparing both quarterly and year-over-year numbers. That is a reversal
from the previous two years, when the growth rate was consistently
decelerating. The increase in average debt was spread out across Canada,
although Saskatchewan saw a slight dip on a quarterly basis and Alberta
experienced decreased annual debt growth.
Bank of Canada governor Mark Carney, among
others, has been warning for years now that debt levels among Canadian
households are getting out of hand.
Thomas Higgins, TransUnion’s
vice-president of analytics and decision services, says the latest report
suggests many Canadians are feeling more comfortable with the idea of taking on
additional debt – and he wouldn’t be surprised to see them borrow more in the
coming months.
“When I look at the recent comments from
the Bank of Canada, that they don’t foresee there will be a change in interest
rates for 12 to 18 months, and now that some of the media attention on Europe’s
issues has died down, I would not be surprised to see the latest rise [in debt
levels] continue,” he said in an interview. “Maybe people are thinking that
they don’t need to tighten their borrowing too much, that they have a bit of
leeway.”
The TransUnion analysis, which includes
non-mortgage debt such as lines of credit, credit card and car debt, as well as
installment loans, is based on anonymous credit files of all credit-active
Canadians.
Although lines of credit are by far the
biggest source of non-mortgage debt among Canadians, the biggest rise in the
most recent report was in auto loans.
Mr. Higgins says that some people may have
put off buying big-ticket items, such as cars, in recent years. “Now that
consumers feel more comfortable, they might be thinking that they are due to
buy a new car. Plus, there are more deals out there and more advertising.”
So far, Canadians are repaying their debt
on time and consumer bankruptcies have fallen to historic levels. Despite that,
Mr. Higgins describes the latest rise as “disconcerting.” He believes that any
potential shocks to the Canadian economy that could lead to unemployment or
cause interest rates to increase rapidly will directly impact consumer’s
ability to repay their debt, and lead to potential delinquency and default
issues.
“The big concern is that at these levels,
individual Canadians may not have the financial safety nets to absorb
unforeseen economic shocks or to be able to weather the storm as long as they
did in the past.”
Ben Rabidoux, an analyst with M Hanson Advisors and author of The
Economic Analyst blog, says that if something spooks Canadians
and they decide on mass to start paying off their debt, that will slow economic
growth and could result in job losses.
“You can not have everyone in Canada pay
off their debts at the same time because that will drag on the economy,” he
said. “It is a strange dynamic. How do you pay off the debt when paying off the
debt itself becomes an economic headwind?”
Jeffrey Schwartz of Consolidated Credit
Counseling Services of Canada says he is disappointed and surprised by the
latest report. “We did have a sense that people were paying more attention to
their debt.”
Canadians need to include debt repayment
and savings into their budget and learn to live within their means. “If we see
job losses and potentially higher interest rates, Canadians won’t be prepared,
and they will go into crisis mode.”
For those who are uncertain about whether
they are carrying a dangerous levels of debt, Mr. Schwartz says these are five
sure signs:
1.
You are struggling to keep up with your
minimum payments
2.
Your credit cards are maxed out
3.
You are paying one credit card with
another
4.
You are spending 15 per cent or more of your
net income paying off your debts
5.
Your income is already spoken for before
you even get your paycheque
