The borrowing binge

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