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The Importance of consumer credit on the economy by Chris Jelly

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On this page you will find an assortment of resources pertaining to Consumer Credit and it's impact on the economy, with a focus on Canadian economics. I hope readers can come away with a better understanding of not only what consumer credit is, but why it is a keystone of any economy.

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This is an interesting academic article about consumer credit. While it is pertaining to the American economy, I think that a Canadian reader can still take away a lot of useful knowledge. Of note, the early portions of this article talks about trends in consumer credit and how they can be precursors to economic crisis. The rest of the entry goes into detail about regulations for consumer credit and banking in America. While these are not directly related to Canada, much of the information is still relevant.

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PICTURE #1 - Household Sector Leverage Indicators, 1990 - Q3 2015

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PICTURE #1 - Household Sector Leverage Indicators, 1990 - Q3 2015

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This graph shows the average debt compared to the average disposable income. It is easy to see the increase in debt is outpacing the income by larger margins as time goes on.

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This brief article speaks largely about the mounting credit card debt accumulating. The worry is that banks will suffer heavy losses on defaulting credit card because of a general lack of collateral. A notable statistic from this article is that consumers owed $1.821 trillion as of the fourth quarter of 2017

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Canadian banks are seeing the creditworthiness of their customers besieged by external forces, according to Moody's Investors Service.

"The strong credit quality of Canadian consumer loans, thanks largely to record low unemployment in recent years, is under threat on several fronts: debt-servicing costs are increasing because of interest rate hikes, the proportion of riskier uninsured mortgages is on the rise, and longer auto loan terms point to greater borrower vulnerability," Moody's said in a report released Tuesday.

But the ratings agency said that the real harbinger is unsecured credit card portfolios, predicting that "the first bite" into the asset quality of the banks would be taken out of that area.

"Banks will have higher losses on credit card defaults because the loss given default is higher than secured forms of lending, but the card portfolios of rated Canadian lenders are small," the report said. "Credit cards lack supporting collateral and have a lower repayment priority than residential mortgages or auto loans; therefore, credit card loan losses tend to occur before, and are more severe, than for other forms of consumer lending."

The report was released amid recent concerns about debt levels in Canada, including the Swiss-based Bank for International Settlements singling out the country for elevated risk indicators, such as its debt service ratio. Equifax Canada said Monday that consumers owed $1.821 trillion as of the fourth quarter of 2017.

Moody's warned that debt servicing costs are likely to rise in the aftermath of the Bank of Canada's three rate hikes since last summer, which would put consumers in a tight spot in any economic downturn.

And while Moody's said that the current quality of credit for mortgages, autos and cards remains strong, it raised concerns about all three areas.

In home loans, Moody's said borrowing had skewed more towards uninsured mortgages, including home equity lines of credit, which the company said was "a direct result" of the Canadian government's moves to try to tame the housing market.

"The proportion of uninsured mortgages, including home equity lines of credit, has increased to 60 per cent from 50 per cent five years ago, with an interest rate reset looming," said the agency. "And almost half of outstanding mortgages will have an interest rate reset within the year, which will increase the strain on households' debt-servicing capacity."

In auto loans, Moody's said the longer terms were a sign of rising risk.

"Longer consumer auto-loan terms increase 'negative equity' - the amount by which the remaining loan balance exceeds the collateral value - because vehicle values fall faster than the loan is repaid," said the report. "This shortfall is often rolled into the initial balance of a new car loan, compounding the negative equity and credit risk."
Financial Post * Email: gzochodne@nationalpost.com | Twitter: GeoffZochodne

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Quality of consumer credit seen 'under threat' as red flags mount

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Canadian banks are seeing the creditworthiness of their customers besieged by external forces, according to Moody's Investors Service. "The strong credit quality of Canadian consumer loans, thanks largely to record low unemployment in recent years, is under threat on several fronts: debt-servicing costs are increasing because of interest rate hikes, the proportion of riskier uninsured mortgages is on the rise, and longer auto loan terms point to greater borrower vulnerability," Moody's said in a report released Tuesday.

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A website to display statistics, this particular one shows credit values through the years from 1971 to 2018. Of note is the fairly continuous increase in credit values. Seeing a spike around January 2017 and a small fall-off after that. These stats show that the average Canadian is accruing more debt as time goes on.

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Trading Economics members can view, download and compare data from nearly 200 countries, including more than 20 million economic indicators, exchange rates, government bond yields, stock indexes and commodity prices.

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Canada Consumer Credit | 1971-2018 | Data | Chart | Calendar | Forecast

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Consumer Credit in Canada decreased to 601453 CAD Million in February from 602341 CAD Million in January of 2018. Consumer Credit in Canada averaged 198103.80 CAD Million from 1971 until 2018, reaching an all time high of 605466 CAD Million in December of 2017 and a record low of 11066 CAD Million in February of 1971.

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Here we have a helpful graph that shows the different types of credit lines over time, adjusted for inflation. It is interesting to note that personal lines of credit are by far the most notable increase.

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A great chart that displays where the average consumer has debt, and the change from 2015 to 2016. While this data is dated, it is interesting to note where the debt is located which is largely in credit cards with auto loans being another candidate.

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VIDEO #1 - How much your credit balance is really costing you

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VIDEO #1 - How much your credit balance is really costing you

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A quick video that goes over many of the concepts from this course. Notably it touches on the math behind calculating one's actual payments on loans as well as going over a few tips on how to correct spending habits. The video stresses that consumers should remind themselves that the money is being borrowed, not that the money is yours to spend.

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Money123: How much your credit card balance is really costing you | Watch News Videos Online

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Watch Money123: How much your credit card balance is really costing you Video Online, on GlobalNews.ca

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VIDEO #3 - Introduction to Consumer Credit Math

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VIDEO #3 - Introduction to Consumer Credit Math

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This video goes over some sample problems involving credit lines and how to calculate it. For those that would like to go further in depth in to how to calculate total costs to pay off debts depending on the interest rates.

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This video goes over the possible outcome of an interest rate hike for the average consumer. Reviewing that the bank of Canada could raise the interest rates in order to curb inflation and debt levels. The video touches on the fact that major credit lenders tend to increase their rates when interest rates go up, which directly influences the average consumer.

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OTTAWA - The ratio of Canadian household debt relative to income edged down slightly in the fourth quarter of last year, raising speculation that the growth in debt may have turned a corner.

Statistics Canada said Thursday household credit market debt as a proportion of household disposable income was 170.4 per cent in the fourth quarter.

In other words, there was $1.70 in credit market debt for every dollar of household disposable income.

That compared with 170.5 per cent in the previous quarter, which was revised down from an earlier reading of 171.1 per cent.
Watch: What happens when there's an interest rate hike?
"While it's too early to tell, we just might have seen the peak in the debt ratio in Q3, as Q1 will no doubt see a sizable decline due to seasonality," said Benjamin Reitzes, Canadian rates and macro strategist at the Bank of Montreal.

Household debt is often cited as a key risk to the Canadian economy by the Bank of Canada and others.

The central bank, which has raised its benchmark interest three times since last summer, has said it is carefully monitoring the economy's sensitivity to higher interest rates.

Statistics Canada reported the key ratio crept lower as total household credit market debt, which includes consumer credit, mortgage and non-mortgage loans, increased 1.1 per cent in the fourth quarter to $2.13 trillion. Mortgage debt totalled $1.397 trillion, while consumer credit rose to $630.4 billion.

Royal Bank economist Josh Nye said it looks like debt growth is turning a corner.

"With interest rates expected to rise further and housing regulations tightening at the federal and provincial level, the peak in debt growth could very well be behind us," Nye wrote in a report.

"That should be viewed as a positive development by the Bank of Canada, though progress on reducing the 'key vulnerability' of elevated household debt will likely be very slow."

The drop in the key debt ratio came as the net worth of the household sector increased 2.1 per cent in the fourth quarter to nearly $10.9 trillion.

Statistics Canada said financial assets were the main contributor, growing by $196.6 billion to nearly $6.9 trillion, led by equity and investment funds.

The value of household residential real estate increased by 0.6 per cent in the fourth quarter, after remaining flat in the previous two quarters.
Also on HuffPost:

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Have Canadians Finally Reached 'Peak Debt'?

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OTTAWA - The ratio of Canadian household debt relative to income edged down slightly in the fourth quarter of last year, raising speculation that the growth in debt may have turned a corner. Statistics Canada said Thursday household credit market debt as a proportion of household disposable income was 170.4 per cent in the fourth quarter.