Record household debt to add pressure to credit cards in next downturn: Moodys

  8/23/2017 |   SHARE
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Unprecedented household debt levels will give Canadians a rude awakening on their unpaid credit card bills if another economic downturn materializes in the coming years, according to a new report issued Wednesday.

Moody's Investors Service it will be closely watching Alberta and Saskatchewan for signs of increased delinquencies on consumer debt portfolios.

The two provinces already saw a doubling of initial unemployment claims in the latter half of 2016, a result of a prolonged downturn in the oil sector after the global price of crude began to plummet in late 2014.

"We wouldn't be surprised to see that as an area of strain in the country,'' said Jason Mercer, an assistant vice-president at the ratings agency.

Moody's said card loan performance in these Prairie provinces in coming quarters will be ``an illustrative first test'' of the ongoing strength of the banks' Canadian credit card portfolios and the broader environment for consumer credit.

"We're all a little vulnerable right now, here in Canada,'' Mercer said.

"If there's a shock in employment, somehow, that could cause consumers to change their spending and their debt service patterns.''

Canadians have seen their dollar-to-debtload nearly double over the past 30 years, as lower interest rates and relatively small economic stresses encouraged more people to spend against things rising house prices, Mercer said.

Moody's says consumers owed $1.69 of debt for each dollar of their disposable income as of March 31.

The meteoric rise of debt has been fuelled partly by attractively low interest rates and a Canadian economy that generally recovered more quickly from the last recession than the United States and Europe. Some analysts have raised concerns that an entire generation was growing comfortable with an unsustainable level of debt.

Moodys says mortgage debt growth, not credit cards, is driving the increase in Canadian household debt.

Consumers typically pay more attention to meeting their mortgage payments over credit card debt, Moodys said, because the flexible payment terms of cards don't lead to losing assets like a home or automobile. However, credit card interest rates tend to be much higher than those associated with mortgages.

Source: The Canadian Press

Canada, Household Debt, NonMortgage Debt, Personal Finance