One of the most comforting and oft-repeated truisms of this financial crisis is that, as bad as things are, we Canadians are far better off than our neighbours in the United States. This is generally and unquestioningly attributed to the fact that Canadians are more responsible and modest than Americans. Most importantly, we never ran up the massive debt loads that are typical south of the border. And so, we smugly shake our heads at the mess in America and congratulate ourselves on our culture of restraint.
Well, so much for all that.
Turns out that while we were happily soaking in the myth of the frugal Canadian, we were celebrating at the malls and treating ourselves to new home theatre systems and a few extra fancy restaurant meals. The global consulting giant Deloitte issued a report on Canada’s debt levels last week, and though it received only passing attention, it should have been more than enough to blow up our smug self-image for good. According to the report, Canada’s household debt-to-disposable-income ratio now exceeds that of the U.S. As of the middle of last year, the typical Canadian household now owes a little more than 1.3 times its annual disposable income, whereas the average American household owes a little over 1.2 times its income. That’s all debt, including mortgages, when compared to our income after taxes and interest costs.
What’s even more striking than the absolute level of indebtedness is the speed of its ascent. According to Deloitte partner Pat Daley, one of the report’s lead authors, Canadian household debt has been rising at a rate of about 10 per cent a year since 2004, while our incomes were rising about half that fast. In all, Canadian credit card balances have risen by a staggering 40 per cent in four years, and now stand at $80 billion. And while most Americans were actively cutting back their debt load last year, Canadians were still piling it on. Last year, the average American’s savings rate rebounded to above one per cent of income, while the Canadian savings rate slipped below America’s for the first time since the early 1970s.
All this, of course, has huge implications for our economy and the health of our banks. But the immediate brunt of our debt issues will be felt by credit card issuers. For the vast majority of North Americans, credit cards are at the very heart of our love/hate relationship with credit. Most adults pull out their three inches of plastic at least once a day, and when tough times hit, it’s often the cards’ onerous interest rates that generate the most pressure. And so, with the economy slowing, perhaps it should come as no surprise that Canadian credit card issuers reported a surge in delinquent accounts of between five and 10 per cent in the last two months of 2008. Most companies say outright losses (on accounts that have been written off and shut down) have jumped by as much as one percentage point since the weather turned cold. One percentage point might not sound like a lot, but it translates into $800 million in annual losses for the card companies—that’s equivalent to every single Canadian household sticking the credit card companies with an unpaid bill for $64.
As you might expect, this trend has credit card companies rather worried. North Americans frequently fall back on their credit cards as their last source of liquidity when times get tough. Clients pay overdue bills with their Visa cards to buy themselves an extra few months of breathing room, and fall back on cash advances when their bank accounts run dry. When the inevitable bankruptcy filings hit, the card companies have little recourse. They simply have to take the loss. With the economy slowing rapidly, these companies have good reason to fear they’ll be left holding the bag as millions of people lose their jobs and fall behind on their bills.
What this means for consumers is that you can expect your card company to be watching much more closely in the months ahead. Remember all that fine print that you never read on your card application? Well, your card company does. Even if you have a perfect repayment history, you may find your credit limit squeezed and your interest rate hiked.
In their efforts to reduce risks and avoid massive losses, card issuers are resorting to what’s called “financial profiling.” It works exactly like racial profiling, and will soon be just as controversial. Credit companies look at the things you buy, where you buy them, and how you pay your bills. If your pattern resembles that of people who often default, you could be in for a nasty surprise, even if you are up to date on your payments.
Use your card to pay a marriage counsellor? Marital trouble could indicate financial trouble ahead. Use it to pay for expensive repairs on your car or to have tires retreaded? That might suggest you don’t have the money to buy a new car, and may raise red flags about your money situation. Even shopping at discount stores like Wal-Mart and Zellers could be enough to spook some card companies.
Kevin Johnson, a 29-year-old Atlanta man with a spotless credit history, recently saw his credit line slashed by 65 per cent. He investigated and was told it was because he loaded up his card during his honeymoon and shopped in certain stores that American Express considers down-market. He has since become a consumer advocate, blogging about his battle with Amex at www.NewCreditRules.com. But it’s not clear exactly what can be done about financial profiling aside from alerting consumers that it’s happening.
We’re in the midst of an unprecedented credit crunch, combined with a deep recession, and Canada is in it just as deeply as the U.S. is. Credit companies lent like fools for years and are now madly scrambling to cope with the consequences. They have to reduce their risk, or this crisis could drag on for years, and that means even responsible borrowers are going to be caught up in their new era of austerity and caution.
The world just got a lot less trusting, even here in “frugal Canada.”