Consumer debt picture improves

While Canadians continue to rack up more consumer debt, there is a ray of hope that the trend may reverse: the rate that we are amassing debt is slowing, according to Equifax Canada’s National Credit Trends Report.

“Consumer debt load continues to increase, but at a much lesser rate than observed in previous years,” says Nadim Abdo, vice-president, consulting and analytical services, Equifax Canada.

“Average outstanding balances for all credit products increased at a rate of 8% in 2010, while the rate of increase in Q4 2011 had dropped to nearly half of that.”

The report also pointed to a “remarkable” improvement in consumer delinquencies and bankruptcies last year. That comes as a relief, as 2009 and 2010 set new records.

The delinquency rate (90+ days) for all non-mortgage credit products fell to 1.4%, down from a high of 1.8% during the recession. That equates to $1.9 billion, according to Equifax.

Abdo points out that Canadians have only reduced their credit card balances—by 3.4%—and not other credit products. This approach is sensible, though, as credit cards tend to carry the highest interest rates and should therefore to paid off before tackling car loans, lines of credit and mortgages.

“Although this appears to be a good news story for Canada, there remains some concerns about the high level of debt Canadians carry on average,” Abdo warns. “Canadians are at record-high levels of indebtedness with little room to maneuver. If there is to be another financial crisis, we can expect losses from serious delinquencies and bankruptcies.”

On a related note, the Financial Consumer Agency of Canada (FCAC) today issued a consumer alert regarding debt reduction companies. The agency warns Canadians to beware of offers that are too good to be true, such as debt reduction plans that promise you will have to pay only part of your debt.

In the U.S., consumer credit increased $20.4 billion in November, according to a report from the Federal Reserve on Monday. This was a sharp increase from October’s $6 billion increase. The overall total consisted of $5.6 billion in revolving credit and $14.8 billion in non-revolving debt.

“The rise in revolving credit, which consists primarily of credit cards, was the largest monthly gain since the spring of 2008 and likely reflects strengthening consumer spending and modestly easier credit standards,” says Troy Davig, senior U.S. economist, Barclays Capital. “Some banks have reported modestly easing credit standards on credit cards, while no banks reported tightening standards.”

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.