Fewer Canadians are missing or defaulting on loan payments according to a report from Equifax Canada. This despite the fact that the average debt balance owed by Canadians continues to grow.
The number of Canadians missing loan payments fell to 1.22% in the third quarter 2012, the lowest level since before the recession. This would seem like goods news except for the fact that Canadian debt levels continue to rise. The Equifax report also reveals that non-mortgage consumer debt increased by 2.6%. And according to Statistics Canada consumer credit continues to expand, increasing by 2.7% in August over the same month in 2011.
Nadim Abdo, Vice President, Consulting Solutions, Equifax Canada says seeing “serious delinquencies drop to a record low of 1.22 per cent is a very positive sign that consumers are doing a great job at managing their debt obligations”.
What the drop really says is that Canadians are managing to meet their monthly loan payments – not that they are managing their overall debt. Consumer debt levels have continued to burgeon in Canada with the debt-to-income ratio reaching a record 163% in the most recent quarter.
The main reason more Canadians are, for now, not missing more loan payments is because interest rates are at historical lows. The question becomes how will Canadians with too much debt be able to cope when interest rates increase? Will interest rate increases cause more Canadians to have to file bankruptcy in the long run because they are not reducing their total debt levels fast enough?
In the report Mr Adbo also states that “Debt is increasing at a slower rate, the actual delinquencies are improving, they’re going down. That to me actually shows responsibility of some sort.” Mr Adbo adds “You could actually argue that people are paying off at least a bit of their credit card debt now.”
If your debt is growing, it’s growing. Growing at a slower rate on a much larger number is still something to be concerned about. Eliminating high interest credit card debt is only the first step in managing debt. Shifting debt from one form to another is not a long term debt solution. The overall objective should still be to reduce your debt in total.
So while the Equifax report gives some hope that Canadians are, for the moment, able to meet their loan payments, these findings unfortunately are just an interest rate hike or unemployment rate increase away from reversing. And at the moment, the risk of either of those events happening in the near term remains high.