The reliance of Canadians on credit card debt as a predictor of financial stress

Context and motivation

In this age of online shopping, having a credit card is nearly a must. In fact, in 2019, 90% of Canadian adults had at least one credit card.1 Roughly half of Canadian credit card users pay off their balance every month, while the other half pay only a portion of their balance and thus pay interest and carry over the remaining debt to the next month.2

Those who carry over debt could be the more concerning group for financial stability because an unpaid credit card balance is associated with a greater chance of being in arrears on any credit product. Unpaid balances also provide an early signal of rising household financial stress.

I assess household financial stress by looking at credit card data from TransUnion, one of two credit bureaus in Canada, to isolate those households who pay their credit card balance in full from those who carry a balance from one month to the next. I then analyze whether those carrying a credit card balance are more likely to miss debt payments in subsequent months.

I also examine how various characteristics associated with carrying a balance influence the likelihood of experiencing financial stress down the road. These characteristics include occurrence, duration and intensity of use. In this note, I define financial stress as falling behind on payments for at least 60 days on any credit product.

Keeping this context in mind, I show in my analysis that:

• In any given month, close to half of Canadians with a credit card carry a balance for at least two consecutive months.
• Canadians who carry a credit card balance will more likely experience financial stress within the next six months than those who pay off their credit card balances in full each month.
  • All else being equal, mortgagors who carry a balance on their credit card are more than twice as likely to fall into arrears on their debt within six months than those who pay their balance off in full.
  • However, non-mortgagors carrying a balance are five times more likely to fall into arrears within that time than those who pay in full.
• Canadians carrying a credit card balance for more than six consecutive months or those who owe the maximum balance on their credit cards become increasingly likely to experience financial stress in the near term. Here again, the probability of falling into arrears by missing a future debt payment is greater for non-mortgagors than it is for those with mortgages.

The dataset

To analyze how Canadians' reliance on credit card debt relates to future financial stress, I use microdata from TransUnion. These data contain the anonymized credit history-including that of credit cards-for over 30 million Canadian residents.3 My sample ranges from January 2016 to February 2024 and covers nearly 58 million active credit card accounts.

For Canadians who have a mortgage from one of Canada's federally regulated lenders, I also examine the influence of a broad set of household characteristics on their use of credit cards.4 For instance, I analyze whether factors such as income or the size of a mortgage in relation to the market value of the property-both of which are captured when the mortgage is first issued-affect the mortgagor's likelihood of experiencing financial stress.

In this note, credit card holders are carrying an outstanding balance if they do so for at least two consecutive months on at least one of their credit cards. Table 1 shows various descriptive statistics, both for Canadians who pay their credit card balance in full each month and for those who do not.

Public link

Please use the above public link if you want to share this noodl on another website.