May 18, 2016 / 8:47 PM / 3 years ago

Canadian subprime debt accelerates as economy pinches consumers

OTTAWA (Reuters) - The debt of Canadian subprime borrowers grew at a faster pace than other consumers in the first quarter, suggesting the weak economy forced some to turn to pricier credit at a time when policymakers are concerned about high household debt.

But Canadians with higher credit scores paid down some types of loans, including credit cards and lines of credit, data from TransUnion showed on Wednesday.

Subprime borrowers, or those with low credit scores, increased their average credit card balance by 5.7 percent in the first quarter compared with the same time last year.

Growth in subprime debt also outstripped that of other borrowers across other types of non-mortgage debt, including auto loans.

Canada was in a brief recession last year, hurt by the slump in oil prices. This could have compelled some Canadians to take on more debt, said Jason Wang, TransUnion’s director of research and industry analysis in Canada.

Indeed, overall delinquencies surged 11.92 percent in the oil-producing province of Alberta in the first quarter from a year ago, far outstripping the national average increase of 2.98 percent.

Debt counseling experts said the subprime increase showed some Canadians lack alternatives due to poor credit scores or having too much debt.

“We are seeing people come in with a multitude of subprime loans, with each one taken out trying to pay the other one, and in the end they owe several at the same time with no means to pay,” said Laurie Campbell, CEO of Credit Canada Debt Solutions.

The rise of subprime mortgage borrowers contributed to the U.S. housing market crash as Americans bought homes they ultimately could not afford.

In Canada, non-mortgage subprime borrowers only account for a relatively small 13 percent of credit-active consumers tracked by TransUnion, said Wang.

Given low interest rates and a relatively stable unemployment rate, it is unsurprising consumers have continued to spend and take on debt, said Nathan Janzen, senior economist at Royal Bank of Canada.

Nonetheless, increased borrowing always makes the economy more vulnerable to a shock, he said.

The Bank of Canada has highlighted high household debt as a vulnerability for the financial system. It said last December that debt has become more concentrated in the hands of more highly indebted younger households who may have less ability to cope with a financial shock.

Reporting by Leah Schnurr; Editing by James Dalgleish

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