As the economy reopened in the second quarter, consumer credit conditions continued to improve, according to a report from financial data firm TransUnion Canada.
The firm reported that its index of credit health, which measures trends in supply, demand, consumer behaviour and performance, rose by nine points in the second quarter to 93.5 points, which is up sharply from its pandemic low a year ago (63.6 in August 2020).
“Positive momentum around key consumer credit trends and performance” combined to boost the index reading in the second quarter, the report said. The demand for consumer credit began to rise and credit applications reached pre-pandemic levels.
Overall, credit applications were up 5% year over year in June, led by a sharp increase in credit inquiries from low-risk consumers, TransUnion reported.
“With the economy reopening and many Canadians returning to some normalcy, we expect to see overall consumption and demand ramp up,” said Matt Fabian, director of financial services research and consulting at TransUnion, in a release.
That said, a second-quarter consumer survey showed that many remained cautious about adding to their debts, with 21% of respondents planning to apply for new credit or to refinance existing credit in Q2, down from 26% in the first quarter.
Additionally, total credit card balances declined by 3.9% year over year in the second quarter, and balances on lines of credit fell by 2.2%.
“We are seeing consumers taking advantage of their higher liquidity to pay down debt,” said Fabian. “According to TransUnion’s recent Consumer Pulse survey, 46% have reduced their discretionary spending and 20% said they paid down debt faster.”
The firm noted that, while credit origination volumes have increased, they haven’t yet returned to pre-pandemic levels.
“Growth in new credit continues to be fuelled by the mortgage market as the pandemic drove a housing market boom,” it said.
Credit performance has also remained strong, the report said. It noted that overall consumer delinquency declined by 0.63% year over year in the second quarter to 1.96%.
On Monday, Statistics Canada reported that Canadians paid down a record amount of debt last year. Non-mortgage debt fell by $20.6 billion from the start of the pandemic to January 2021, including a $16.6-billion drop in credit card debt. Mortgage debt, however, rose by a record $99.6 billion over the same period.
Future credit trends also look positive, amid continued economic recovery and low interest rates. Yet this remains subject to the trajectory of the pandemic and its effect on the economy.
“While pandemic-related threats to the economy do remain, as Canada continues to reopen, we expect consumers to increase their spending and for the recent acceleration in new credit growth to continue,” said Fabian.
“Lenders should consider ramping up their acquisition strategies and channels accordingly. Market competition for acquisition and share of wallet will be high, as debt levels remain well below pre-pandemic levels,” he added.