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Government support programs propping up consumer finances

While new statistics show COVID-19 has reduced Canadians’ credit use and therefore lowered delinquencies and insolvencies, industry analysts say credit use could spike again as soon as later this year.
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While new statistics show COVID-19 has reduced Canadians’ credit use and therefore lowered delinquencies and insolvencies, industry analysts say credit use could spike again as soon as later this year.

The latest TransUnion Canada industry insights report, released in late August, showed that the COVID pandemic has changed consumer behaviour, resulting in a slide in credit use and lower balances, which has in turn led to a rise in payment deferrals.

While those trends and the resulting drop in insolvency and delinquency rates were encouraging, showing lender-borrower co-operation in these tough economic times, the numbers also reflect proactive government programs like the Canada Emergency Response Benefit (CERB), said Credit Counselling Society director of counselling Isaiah Chan.

As these programs approach the finish line later this year, the credit use trend may revert to heavy credit use, and consumers may be in for a rude shock if they are not preparing properly.

“If things continue the way that they are, we will likely see a tipping point where consumers will have to begin accessing credit more,” Chan said. “It’s probably not realistic to assume that [credit use] will continue to go down, and it’s probably not realistic to assume that delinquencies will continue to go down. At some point, those trends will change as government and lender programs expire.”

Federal officials announced in August that CERB will be extended to Sept. 26, but the program isn’t expected to continue beyond that. Meanwhile, Ottawa has made changes to employment insurance (EI) requirements to temporarily allow more people to be eligible post-CERB.

Even with the additional EI help, a good rule of thumb, Chan noted, is to establish a stable household budget and financial plan that could stand on its own – without aid – under the assumption that income recovery to pre-COVID levels may not be coming soon.

“You have to figure out what you can and cannot afford. … The best budget has to be realistic; you have to respect your needs – and remind yourself it is just a plan. It can change. The point is, by putting pen to paper, you can begin to look at the situation more objectively and start making some decisions.”

The TransUnion report showed bank credit card balances for Canadians fell by 12.3 per cent, to $84.6 billion in Q2 2020 versus the same three-month period in 2019. That drop is accompanied by a 3.3 per cent drop in auto loan use and 3.2 per cent drop in lines of credit, the report showed.

The total number of Canadian consumers with access to credit continues to grow, hitting 29.2 million this year (up 1.5 per cent from last year). But that growth has now fallen off to an annual rate below the typical two per cent to three per cent, TransUnion said.

Meanwhile, 18 per cent of the consumers TransUnion surveyed said they are receiving loan accommodations from lenders – such as deferrals or payment holidays. The areas of credit where this phenomenon is the most common are credit cards (29 per cent), mortgages (28 per cent), personal loans (17 per cent) and utilities (16 per cent).

“COVID-19, of course, continues to be the dominant driver of changing conditions in credit markets, but it is very encouraging to see lenders and borrowers working together to adapt to the new environment,” Matt Fabian, director of research and industry insights at TransUnion, said in a written statement.

Among the more encouraging statistics are credit card payment delinquency rates, which fell to 0.75 per cent in Q2 this year as many consumers put off unnecessary spending, the report said.

There are areas of concern, however.

TransUnion noted that more people are dipping into their savings to face looming financial hardship, with 13 per cent of Canadian respondents now using money from tax-free savings or registered retirement savings accounts to counter costs.

The report also indicated that younger consumers with less savings and cashflow are even more susceptible to debt and credit use.

Chan said the numbers correspond to his experience at the Credit Counselling Society, which has seen a lot more “panic calls” from people who are now seeking advice on how to regain their financial footing in light of either losing their jobs, seeing their income reduced or experiencing a reduction in overall business.

“What we need to recognize right now is that many Canadians are facing a long-term loss of income,” Chan said. “So while the credit data shows this trend, that’s not the reality for everyone. Some people are needing to dip into savings or credit to make ends meet; so as a whole, I think what the statistics show more than anything is that Canadians are mindful of where they spend.… It’s really important right now for people to take a look at their own situations.”