We were already talking about it in 2011. The Quebec Minister of Justice at the time tabled a bill that included among its flagship measures the increase, from 2% to 5%, of the minimum monthly payment required for credit cards. The measure has been in effect since 1er August 2019. We will be at 4%.
It was pointed out that between 15% and 20% of households only pay the required minimum each month. With a credit rate varying between 8.99% and 29.99%, averaging around 19.9%, we were invited to imagine the impact of compound interest on the increase in indebtedness. According to the Financial Consumer Agency of Canada (FCAC) calculator, for a balance of $1,000 on a card with a credit rate of 19.9%, a consumer making a minimum payment set at 2% would pay off his debt in 25 years and 10 months, paying interest charges of some $3,000. At 5%, the repayment spans six years with an interest expense of $442.
The Consumer Protection Office adds that for a consumer repaying only the monthly minimum on the balance of his credit card, the increase of half a percentage point represents an additional payment of $5 per month for each $1000. With the minimum payment set at 4%, that same $1,000 debt will take seven years and eight months to pay off, with credit charges of $607.
This minimum threshold, at 4% in August, will continue to rise to reach 5% in 2025 at the rate of 50 basis points annually. Credit card contracts entered into since 1er August 2019 cannot provide for a minimum monthly payment of less than 5% of the balance.
If we generally remember that 70% of credit card holders pay their balance in full each month, many of them use their personal line of credit, which commands a lower rate than that of a credit card or a personal loan, but which has suffered since the beginning of 2022 from the impact of the Bank of Canada’s monetary austerity.
Everything must therefore be put in the context of a solid rise in interest rates combined with a sharp rise in inflation causing an explosion in the cost of living, the impact of which is amplified by an erosion of purchasing power. As a result, the proportion of Canadians who say they are insolvent has reached a new high, according to the latest Consumer Debt Index from insolvency specialist MNP. More than half (52%) say they are $200 or less away from not being able to make ends meet at the end of the month. Of that number, just over a third (35%) say they don’t make enough money to pay their bills and pay off their debts, the highest proportion since the Index was created five years ago, MNP points out.
No wonder, then, that demand for credit remained high in the first quarter. According to the Equifax Canada report, total consumer debt increased by 4.9% compared to the same period last year. As for the balance of credit cards, the increase amounts to 14.5% in the interval.
The agency adds that, on average, consumers are spending 21.5% more each month on their credit cards, compared to before the pandemic. On average, these spend topped $2,200 this quarter per cardholder, up about $400 from the first quarter of 2020. “The largest increase […] comes from consumers who pay less than 90% of their credit card balance each month. »
According to an overall picture, during the first three months of the year, 175,000 additional consumers experienced payment defaults related to at least one non-mortgage product, which represents an increase of 18.8% compared to the corresponding quarter of 2022.
While at the end of 2022 arrears rates were higher among mortgage-free consumers, “recent data shows a growing number of mortgage holders showing defaults on non-mortgage products.” The increase is 15.7% compared to the first quarter of 2022, and almost double the rate of 8.9% observed from the fourth quarter of 2021 to the fourth of 2022.
Mortgage borrowers in difficulty
Mortgage borrowers don’t have it easy either. In a survey published in June, FCAC observes that:
• More than a third (35.5%) of Canadians have a mortgage. Two-thirds of them struggle to meet their financial commitments. Those who are able to do so without issue have declined by 22.2 percentage points since the start of the survey (August 2020). Only one holder out of three today declares being able to cope with it without difficulty;
• The proportion of these cardholders who have had to dip into their savings due to the economic context has increased by 20 percentage points since the start of the survey, while the percentage of people who spend more than they earn is at its highest level;
• The percentage of holders having to borrow more and more to cover their daily expenses increased from 27.3% in August 2020 to 39.5% in December 2022.
And to say that, according to Statistics Canada data released this week, rising grocery prices (+9.1% from June to June), mortgage interest costs (+30.1%) and rents (+5.8%) are among the main factors contributing to the increase in inflation last month (year-over-year). In other words, the Consumer Price Index rose 2.8% year over year in June. But the all-items index excluding food rose by 1.7% and that excluding the cost of mortgage interest, by 2%.
The Bank of Canada added to this on July 12, with an additional increase of 25 basis points in its key rate, to 5%.