Consumer debt is a key concern for the Canadian economy. Mortgage debt in particular is closely monitored, as it represents the greatest share of consumer debt in Canada. However, given the strong history of mortgage debt repayment in Canada, and given that mortgages are secured by collateral, understanding the use of unsecured debt is important, as it may actually represent a greater risk to the economy. This report provides further insights on the composition of consumer debt among different credit products, namely credit cards and mortgages. Due to data limitations, consumers’ credit analysis is usually limited to comparing credit products by outstanding balances, but a couple of factors should be carefully considered in this approach:
- Not all types of debt have to be paid off at the same time
- Credit products have different fees and interest charges
In order to better understand credit payments, we used data from Equifax Canada to compare monthly scheduled payments by credit product. Specifically for credit card debt, we looked at two scenarios:
- Consumers required to make their minimum payments each month
- Consumers required to pay off their balances in full every month
We examine these two scenarios, as they represent the two extremes of monthly credit card obligations supported by Canadians. In this analysis, it is important to recognize that:
- by far, mortgages account for the largest share of consumer debt. However, their interest rates are lower than those of other credit products, and the debt is paid off over many years.
- credit cards have higher interest rates and are typically used for short-term credit.
In between the two credit types mentioned above, there is a wide range of loans and credit instruments with different repayment terms including loans for cars, furniture or home renovations.
Mortgages account for the largest share of both debt and scheduled monthly payments
Of all consumer credit products, mortgages account for the largest share of total outstanding debt, at 66.5%. When looking at consumers’ scheduled monthly payments, the share drops to 47.0%.
Credit card debt accounts for 5.3% of total outstanding debt. However, as a share of scheduled monthly payments, credit card debt rises to 14.6%. Credit card debt represents a greater percentage of total scheduled monthly payments than of total outstanding debt.
Credit cards’ share of monthly payments balloons if consumers pay off full balance every month
The figures above are true when considering only minimum credit card payments. If we replace minimum payments with the full amount required to clear the total balance each month, the credit card share of monthly debt payments rises to a whopping 87.9% (see chart 1).
Note that we are using this comparison to illustrate that examining minimum monthly payments may underestimate the exposure of the Canadian economy to short-term credit sources, not to suggest that consumers should be required to pay their credit card balances in full on a monthly basis.
The increase in share of consumer debt can partially be explained by the fact that a much larger proportion of consumers have a credit card (88.5%) than a mortgage (28.9%).