‘Tis the season: Indebted Canadians pull out the plastic

Canadians are among the world’s biggest users of credit cards. We make even Americans look prudent.

A consumer pays with a credit card at a store Tuesday, July 6, 2010 in Montreal. Canadian household debt has climbed to record-high levels. With interest rates at historic lows, fretful economists and other experts are wondering how the overspending train can be stopped in 2016, and what will happen should rates start to climb as they are in the United States. THE CANADIAN PRESS/Ryan Remiorz


As the holiday shopping season ticks down to its final minutes, many Canadians will make a flurry of last-minute pre-Christmas purchases before launching themselves into Boxing Day’s maw. And odds are, nearly all of those transactions will rung be up on credit cards.

The country’s love affair with borrowing—households in Canada owed a record $1.64 for every dollar of disposable income they earned in the third quarter, according to Statistics Canada data released this month—is matched only by our fondness for paying with plastic, despite interest rates on carried balances as high as 25 per cent.

One Bank of Canada study last year found Canadians are among the world’s biggest users of credit cards, which account for more than 40 per cent of the value of their purchases. That’s even higher than in the United States, where President George W. Bush once famously urged Americans to demonstrate their resolve after the Sept. 11 terrorists attacks by going shopping.

Share of all payments made-br-on credit cards (by value of purchases)

Another study by Canada’s central bank earlier this year noted an 11 per cent increase in the volume of credit card transactions over the past five years, thanks to a “tripling of contactless credit card transactions.” In other words, the easier banks and credit card firms make it to swipe, insert or, now, wave their cards at the cash register, the more willing Canadians are to borrow and spend.

Not even Canada’s oil-shocked economy has caused Canadians to rethink the wisdom of buy-now, pay-later. If anything, the downturn has had precisely the opposite effect. An analysis earlier this month by credit agency TransUnion found average credit card balances heading into the holiday shopping season were at a two-year high at of $3,745. Jason Wang, the director of research and analysis for TransUnion Canada, cited a dearth of disposable income available to consumers in the oil patch (which may have resulted in more purchases being charged to cards) and the Bank of Canada’s two interest rate cuts this year (which makes carrying debt more affordable). However, Wang cautioned that, “In any economic environment, our advice to consumers is always to remember to spend within their means.”

The good news is most Canadians continue to make their monthly payments. In fact, the Bank of Canada’s recent financial system review found 55 per cent of Canadians view their credit cards as a convenient alternative to cash, paying off their balances in full each month. That’s up from 48 per cent of Canadians in the early 2000s. So while credit card spending has risen by about a third over the past 15 years, average outstanding balances have actually declined over the same period. One notable exception to the rule are wealthy households who rent their homes. This group is far more likely to carry balances on their credit cards—presumably because it’s more difficult for such households to access cheaper methods of borrowing like home-equity lines of credit.

Yet, despite increased evidence of responsible credit card use, the sheer number of credit cards in Canadian wallets and pocketbooks—about 72 million of them, complete with all manner of reward points and cash-back promises—serve as yet another example of this country’s love affair with debt, and our easy access to it. When coupled with more than $1 trillion in mortgage debt on the books, it’s no wonder Ottawa is worried about Canada’s ability to withstand another financial crisis. From the bank’s recent financial system review: the number of “highly indebted” Canadian households, meaning those with outstanding debts worth more than 350 per cent of gross income, has doubled to eight per cent since the 2008 financial crisis. Faced with a sudden drop in employment, many of these families could suddenly find themselves struggling to pay their mortgage, leading to a widespread downtown in the Canadian housing market. “The probability of this risk materializing is low, but the impact on the economy and the financial system would be severe if it were to materialize,” the central bank warned.

Already there’s evidence some Canadians are in over their heads. A recent survey by Manulife Bank suggested four of every ten Canadian homeowners were “caught short” at least once last year, meaning they had insufficient money in the bank to make their mortgage payment. And guess where a third of them turned? To the handful of high-interest credit cards burning a hole in their pockets.


‘Tis the season: Indebted Canadians pull out the plastic

  1. Nothing wrong with using credit cards, just make sure you pay them off every month. I use credit cards for virtually everything as it is much easier. I also pay them off every month.

  2. Use ’em for the points. Never carry a balance. Never pay a penny in interest. If you can’t use them exactly that way all the time, don’t use them at all. Ever.

  3. “average outstanding balances have actually declined over the same period”, so where’s the problem?
    Charging a higher proportion of one’s purchases on a credit card doesn’t mean that one is planning to carry a balance and thus accrue interest charges. A credit card is a method of payment that actually costs nothing if used correctly.
    This article fails to mention the surge in online purchases between the early 2000’s and today. I believe one of the reasons why Canadians charge more on their credit cards is because they can’t pay by debit with most online stores whereas in the US, they’ve been able to pay by debit for as long as Visa has issued debit cards.

  4. Why do people assume that credit usage automatically equals debt?

    I’m sure I’m not the only one who obsessively monitors his bank balance and credit card statements several times a week (mainly to check for fraudulent charges). If I have $1000 in my bank account, then I have $1000, no more, no less. Whether I use cash or the plastic, I am always aware that I can’t spend more than $1000. I honestly don’t understand people who think that this piece of plastic magically gives them an extra $1000…

    Credit cards are convenient, especially since Canada has chip cards and tap-payments (something the US is excruciatingly slow to catch up on). It’s a lot more convenient for me and the checkout worker if I tap my card against a scanner at the grocery checkout, rather than fumble with change. If everyone in line pays by card, it saves time and makes busy periods less frustrating.

    Additionally, credit cards offer some security. Let’s say I’m mugged or pickpocketed. Any cash I carry in that wallet is gone for good. But a quick phone call or bank visit can ensure that the credit card(s) in that wallet become useless, and if any purchases were made immediately after the theft, I am not liable to pay them. I very rarely carry more than $50 in cash for this very reason. Additionally, credit card statements are a way of tracking down past purchases in case you didn’t keep the receipt. One time, a collections agency accused me of not paying a parking ticket – and I quickly rebutted by showing my credit card statement with the payment and they were forced to admit they were wrong.

    Many Canadian e-tailers don’t accept debit cards (unlike in the US), making it absolutely necessary to use credit cards if you want to order online.

    Did I mention the points? I’ve gotten flight upgrades and other travel perks, and my friend even got a free iPad, because of points accumulated by putting as many expenses as possible on the card. Didn’t cost us extra.

    I pay off my balances way ahead of time. If a new $5 charge for a sandwich appeared between now and the last time I checked, I pay that immediately – what’s the loss? Credit card debt is something I will never have in my lifetime. Most of my friends and family act the same way.

    I understand taking on debt for big-ticket necessities like a home, or a smart business investment – most people do not have that kind of liquid cash. Additionally, a strong market means that the debt can immediately be wiped out while still leaving profit once the asset is sold – do your homework and some debt can actually be a smart move. But taking on debt over your TV or sofa purchase? I will never understand that. Even car loans are stupid to me – just drive an old beater for a few years while setting aside money every month and then pay for a nice newer-model car with cash. I initially bought a rattling old Civic for $2500 and three years later, paid for an almost-new 1.5-year-old hybrid car with more than $20k in cash. A friend stuck with his ancient Corolla for eight years before buying a brand new BMW, also with cash. If we lose our jobs, we don’t get our cars repossessed. And we never paid a cent in interest.

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