Canadians are increasingly vulnerable to “payment shock” as higher household debt levels collide with oversized interest rate hikes.
The Bank of Canada raised its key lending rate by three-quarters of a percentage point Wednesday, making it more expensive to borrow money in a time of climbing debt.
It’s a situation experts say could push some to a breaking point as they rely on higher interest rate loans and credit cards to pay for the soaring cost of everyday essentials.
Wes Cowan, a licensed insolvency trustee and senior vice-president at MNP Ltd., says people are increasingly using credit cards and loans to make ends meet.
He says given growing debt levels and escalating interest rates, he expects to see more people struggle to make minimum debt servicing payments in the coming months.
Meridian Credit Union senior wealth advisor Paul Shelestowsky says the risk of payment shock is front and centre as people grapple with the confluence of high inflation and high interest rates.
“Anything that has a variable rate attached to it, like the lines of credit, we’re going to see a huge payment shock,” he says. “Everything is more expensive — buying groceries, heating your home, the basics — and now servicing your debt will cost more too.”
Credit reporting agencies Equifax Canada and TransUnion Canada both released reports this week highlighting the recent growth in household debt.
Equifax said total consumer debt climbed 8.2 per cent in the second quarter of 2022 compared with the same quarter last year.
Meanwhile, TransUnion’s latest credit industry report said total debt grew to an all-time high at $2.24 trillion, up 9.2 per cent from the same time in 2021 and up 16.4 per cent from pre-pandemic levels at the end of 2019.
The agency also said credit card balances and the risk of consumer delinquency on personal loans has also increased.
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