The COVID-19 pandemic in Canada has suppressed consumers’ use of credit across the country, a new report finds.
According to the TransUnion Canada 2020 Industry Insights Report released this week, the form of credit most seriously impacted has been bank credit cards, where balances fell by 12.3% to $84.6 billion in Q2 2020 versus the same period last year.
An accompanying Financial Hardship Survey showed that credit-card utilization fell dramatically because two of the most likely personal expenditures to be postponed during the pandemic - vacation/holidays and home improvements - are heavily tied to credit-cards as a form of payment.
“As the crisis progressed, the number of consumers seeking credit… plunged at the start of Q2 2020, then slowly grew to pre-crisis levels by the end of the quarter,” the report said. “The slowdown may have been driven by a combination of reduced access to branches during the lockdown, and uncertainty around employment and the implications of the lockdown causing consumers to defer taking on new debt.”
Two other forms of credit use also saw declines so far in 2020: Auto loans, down 3.3% to $62.4 billion, and lines of credit, down 3.2% to $248.9 billion. The use of installments ($175.4 billion) and mortgages ($1.3 trillion), however, were up 3.9% and 5.3%, respectively.
The report also noted some demographics incurring more debt and using credit more often during the crisis. According to officials, as the overall number of Canadian consumers with delinquent balances fell, non-mortgage credit balances rose for two age categories: Millennials (0.8%) and Gen Z consumers (5.9%).
“It is harder for younger consumers to absorb economic shocks like this as they have fewer options to maintain cashflows, like savings, investments or retirement funds,” the report said. “As a result, it is likely that more of these younger consumers have been forced to rely on credit.”
In its accompanying survey, TransUnion found 63% of Millennials and 65% of Gen Z consumers felt negatively impacted by the COVID pandemic.
The slowdown in credit use among Canadians have helped drop delinquency and insolvency rates, officials noted, although an increasing number - now 18% - of consumers are now using deferrals or payment holidays to manage their financial situation. Also, about 13% of consumers say they are now dipping into their TFSA or RRSP accounts to help pay bills.
“Many Canadians are opting to dig into their personal savings and investments rather than taking on additional debt, which could partly explain the general decline in new originations,” said TransUnion financial services research director Matt Fabian in a statement.
“There are obvious longer-term implications to this approach, but this is an unprecedented situation, and we will have to see how sustainable it is if the economic recovery is slower to materialize.”
Overall, the number of Canadian consumers who can access credit continues to grow in 2020, rising 1.5% to 29.2 million. However, that annual growth rate is significantly lower than the typical 2-3% growth seen year-over-year.
