In the third quarter of 2019, overall credit card balances reached a record high of over $100 billion and are expected to rise from an average of $4,240 to $4,465. Although inflation and unemployment are bolstering the market to some degree, this continued increase could be a sign of growing pressure on personal finances as consumers use cards to help make ends meet.
The latest TransUnion Canada Industry Insights Report (Q3 2019) indicates a potential weakening of the consumer credit market; however, the outlook for 2020 is relatively positive. Here are three trends to watch in the year ahead, based on TransUnion’s forecasting models.
1) Higher risk of increase in credit card delinquency rates
As overall consumer debt continues to rise, the proportion of consumers that would go seriously delinquent on one or more cards in their wallet is expected to rise to 2.98% at the end of 2020. Our research has shown that credit cards rank below auto loans and mortgages in the payment hierarchy. When consumers can’t afford all their credit payments, they usually favour auto loans and mortgages over credit cards — as our forecast for 2020 shows.
2) Potential regional shocks contributing to slight rise in overall delinquency
We anticipate that serious delinquency will increase early in the year, then begin to correct for most products. Instead of a widespread downturn, regional economic pressures will drive delinquency rates.
Continued struggles in the energy sector and trade restrictions on agricultural producers are likely to weaken the economies of the prairie provinces — which in turn will have an impact on unemployment and income.
The severity and length of these economic shock events could see delinquency rate increases of up to 50 basis points in certain areas as consumers’ capacity to service their debt becomes constrained.
3) Mortgage market continues to bounce back
Average balances are forecast to grow 3.6% by end of 2020, to $285K and delinquencies are expected to remain low and stable.
Stricter mortgage qualifying rules and stress tests have had the desired effect on the mortgage market, limiting many consumers’ entry into the housing market over the last 18 months. However, lower long-term interest rates and a demand for housing have contributed to an increase in origination volumes (up 4.5% YoY) and average mortgage balances (up 1.3%) — growth we expect will continue as demand increases and the market further acclimatizes to the new rules.
Read more in our Q3 2019 Report
While we expect positive, albeit low, economic growth in 2020, lenders should keep a close eye on both their portfolios and the economic climate so they can implement downturn strategies if necessary.