How inflation has impacted debt levels and credit card behaviours
Jordan Lavin
Inflation is starting to slow down in Canada, but prices are still increasing faster than they have in decades. And while the official measures say that common goods and services cost about 11% more today than they did just two years ago, your latest grocery receipt probably says otherwise.
As Canadians struggle to pay for the essentials, the consequences of inflation are beginning to affect debt levels and credit card behaviours. A recent report from the credit bureau, Equifax, reveals that people are using their credit cards more and having more difficulty paying their credit card bills.
Credit card use is up as inflation persists
Many Canadians are leaning on their credit cards to help keep up with rising prices. The Equifax report says 300,000 more Canadians carried a balance on their credit card at the end of 2022 than did the year before, helping raise our collective credit card debt above $100 billion.
As people take on more and more credit card debt, more people are having trouble making their payments. Overdue balances are up 23% since last year and the number of people seeking credit help has risen by 26.4%.
Despite this, Canadians are picking up new credit cards in record numbers. Over 1.4 million new credit cards were issued in the last three months. At Ratehub.ca, we’ve seen a noticeable uptick in people seeking out the best credit cards for cash back on groceries in a bid to make life more affordable.
Young Canadians, renters more likely to rely on credit cards
While debt and delinquencies are up across all demographics, young Canadians and those who don’t own their home are the most likely to be using credit cards and having trouble with debt.
Those under age 35, who are the least likely to own a home and earn less than $37,000 on average, have seen the largest relative increase in credit card debt. They’re also the most likely to have fallen behind on payments, with the demographic’s delinquency rate approaching 1.5%.
Homeowners seem to be having an easier time keeping up with their debt payments than non-homeowners. Missed payments were up 6% at the end of 2022 among those with mortgages, but up 11% among those without a mortgage.
Consumer spending strong despite continued inflation
Inflation doesn’t hurt consumer spending, but consumer spending does hurt inflation. In fact, that’s why the BoC’s response to rising inflation is to raise interest rates.
Inflation is a product of supply and demand. When demand is greater than supply, vendors can charge more for their goods and services. And as long as people are willing tokeep paying the higher price, costs will continue to rise.
When inflation is high, the BoC raises interest rates to take money out of the economy and reduce demand. In a healthy economy, all of these forces balance out to create a predictable inflation rate of around 2%.
The inflation we’re experiencing right now is caused by a combination of stressed supply chains and pent-up demand following the pandemic. Until one or both of those issues subsides, inflation is likely to continue.
Canadians appear able to pay higher prices and current indicators show consumer spending isn’t slowing down. A report from TD Economics shows that personal spending has continued to increase over the past three months, with notable gains in spending on services and dining out. The report shows that healthy employment growth is contributing to consumer confidence but hints that spending could slow down as interest rate hikes catch up with more mortgage borrowers.
How do you pay off debt during inflation?
It can be hard to pay off credit card debt when everything in your life is getting more expensive.
The first step is to stop taking on more debt. Take a careful look at your budget and make a plan to spend less than you earn. This may involve some lifestyle changes, but it’s usually more effective to increase your income if you have a feasible way of doing so.
The next step is to eliminate your highest interest debts – typically credit cards – as quickly as possible. Consider withdrawing money from savings to cover the expenses (you’ll pay far more interest on a credit card than you’ll ever earn in a savings account) or transferring your balance to another card or loan with a lower interest rate.
From there, commit a reasonable amount of your monthly income to debt repayment and start by paying off the debt with the highest interest rate first. Start with your credit cards, followed by unsecured lines of credit, car loans, and mortgages, in that order.
Take a look at our guide on how to pay off your credit card and reduce interest charges for more ideas to lower your debt. If you’re in way over your head and can’t get out from under your debt, a licensed insolvency trustee can help you negotiate with your creditors and become debt-free.
The bottom line
As the cost of living continues going up, more Canadians are relying on their credit cards to get by – and a greater proportion are having trouble making the payments. Have a plan to stay on budget and keep your credit card debt to a minimum to stay ahead of rising prices.
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