Canadians who have turned to their credit cards in order to keep up with the rising cost of living are at risk of pushing themselves further into financial hardship in the event of a recession, experts say.

Heading into the 2008-2009 financial crisis, Canadians owed $1.52 for every dollar of disposable income, which has since risen to $1.82 as of 2022, according to data released by Statistics Canada. 

The rise in debt levels that Canadians are obligated to pay off has some experts cautioning of a possible increase in credit card defaults, especially during a period of heightened economic uncertainty. 

“The consumer debt picture feels different this time compared to the 2008-2009 crisis,” Yanchuk Oleksy, the chief executive officer of Credit Counselling Canada, said in a phone interview on Wednesday.

In 2008-2009, consumers were battling an economic collapse triggered by defaults on home mortgages. This time, Canadians would be hit with a recession while already struggling with sky-high inflation, supply chain issues and the economic fallout of the COVID-19 pandemic, she explained.

“There’s a sense of consumer fatigue that wasn’t present before,” Oleksy stated.

When consumers are overleveraged and financial setbacks occur, they usually go from paying their credit cards in full, to the minimum or partly, and eventually no payments at all, Oleksy stated. In this scenario, consumers usually lose access to future credit for an extended period of time which adds onto their financial hardships, she added. 

Credit card use in Canada has increased for the sixth consecutive quarter as of October 2022, according to Equifax Canada. Their study also showed that credit card balances stand at a record high of $2,121 since the end of September, while the total non-mortgage debt per consumer was at $21,188. 

The findings cited increased cost of living and mounting debt as top financial concerns for Canadians.
For one economist, the risk of a collapse in consumer debt will come down to how many people lose their jobs in the event of a recession.  

“If one person loses their income in a two-person household its likely they won’t survive the debt trap,” Charles St-Arnaud, the chief economist with Alberta Central, said.

He noted that the biggest risk facing the Canadian economy is the household debt picture as consumer income gets squeezed between inflation and paying down massive debt levels that accumulated over the last decade when interest rates were low.

“If the focus of the last recession was mortgage defaults, this time around consumer debt defaults would likely be the first to crack in a coming recession,”, Pedro Antunes, the economist for the Conference Board of Canada, said in a phone interview.

Canadians have larger mortgage debt now than they did before the 2008-2009 crisis, as the prices of homes throughout the country have skyrocketed, he explained. It’s for this reason that servicing mortgage debt has become their first priority, he added.

“If folks are going to default on payments it will be credit cards instead of mortgages because at the moment it is the lesser of the two evils,” he said.