The way Canadians manage their money has changed dramatically in the last 18 months. When COVID-19 was first declared a global pandemic Canadians saw an immediate impact on the economy and many lost their jobs.
Those who have been able to work throughout the pandemic have seen their savings increase. Statistics Canada says in 2020, Canadians saved $212 billion dollars compare that to 2019 when Canadians saved only $18 billion.
But for those out of work who have seen their jobs stop and start because of economic shutdowns, money has been tight. Millions have been forced to rely on government supports like the Canada Emergency Response Benefit and others worried about their future job prospects.
All of this has led to payment priorities changing too.
What to pay first?
A new report by credit rating agency TransUnion called the Global Payment Hierarchy study looks at where residents of five different countries, inducing Canada, have been prioritizing their payments. They found in Canada consumers have prioritized their mortgage loan payments over auto loans, credit cards, installment loans, and lines of credit.
Traditionally Canadians have been very good at making their mortgage payments on time. The latest data shows that in March 2021 only 0.22 per cent of mortgages were in default in Canada according to the Canadian Banker Association.
Focussing on your mortgage debt, while ignoring high-interest loans, can be a more expensive method to tackle your debt. If you have high-interest debt, like credit card debt or a balance on your unsecured line of credit, it will save you more money to pay those down first.
TransUnion has tracked payment hierarchy dynamics in Canada for more than a decade, and in many other countries when they have encountered localized financial challenges. The study looked at consumers that had at least one credit card and one personal loan. They also chose profiles with no delinquencies reported at the time of selection. The credit reporting agency’s study then looked at the payment performance of those consumers 12 months later to see which consumers were 30 or more days delinquent on their credit cards and personal loans.
The study points out mortgage borrowers were able to keep their balance in good standing, in part because of the pandemic-related mortgage deferral. The program allowed borrowers to delay payments for up to six months while maintaining their accounts. This did cost borrowers as interest was charged on the amount being deferred, but for many, this meant increased cash flow at a time when their money situation may have been precarious.
“This study is unique in that it highlights how and why payment dynamics changed in different countries as a result of the COVID-19 pandemic – a global crisis that has impacted consumers worldwide,” says Matt Fabian, director of financial services research and consulting at TransUnion
In Canada, as it is in the United States, personal loans remained a priority, whereas in South Africa paying down credit cards was a priority during the pandemic.
“These insights will better equip both financial institutions and consumers, fostering more trustworthy interactions between them as the world begins to normalize and recover from the pandemic,” Fabian says.
Rate of delinquencies down
Despite making personal loans (e.g. mortgages) a priority, Trans Union also reports credit card delinquencies year-over-year have come down. This, they say, shows how Canadian consumers prioritize keeping their credit cards in good standing, especially during the pandemic when so many transactions are only being done online using credit cards.
This speaks to Canadians commitment to keep all accounts active. Despite job losses and economic shutdowns, the focus has remained on paying down personal loans while keeping credit cards in good standing. This also means, for those who have prioritized debt this way, that after the pandemic their personal finances will not be damaged with lower credit scores and unmanageable debt.
Credit scores healthy
The study goes on to say Canadian consumers recognize there will be consequences if they miss a credit card payment, with nearly three-quarters (72 per cent ) of respondents saying they expected negative impacts on their credit score if they were late even once.
In Canada, credit scores range between 300 and 900. The higher the number, the more creditworthy you are. Your credit score is determined by a number of different factors, this includes your outstanding debts, your payment history, and spending behaviour.
Ready for financial success
With Canadians paying more attention to their personal loans while also keeping their credit cards in good standing, credit scores are bound to rise. Lenders will see these consumers as more credit-worthy. A higher credit score also makes it easier for consumers to secure mortgages and other loans at the lowest interest rate possible.
“The pandemic has changed so much in the world, but understanding why consumers are making important credit decisions only serves to better help the lending ecosystem in the future,” says Fabian.
The bottom line
The Trans Union study gives us a glimpse into Canadians spending habits during the pandemic, but can also be a predictor of how we will fair after the pandemic is over.
No doubt keeping your loans in good standing, including your credit card payments improves your financial health. According to this survey by TransUnion, many Canadians are poised for credit success when the pandemic ends.
But, many Canadians have become used to this new way of managing their money, not having extra activities to spend on like restaurants, travel and kids’ activities. For this reason, there will be some budget ‘re-learning,’ that will have to happen when we get back to our new normal. The temptation, once everything is fully open and safe, might be to go out and spend freely after a year and a half of being unable to.
Interest rates still remain at historic lows, when rates rise we will see our cost of borrowing rise too. By reducing your debt load now you make it easier to manage your personal finances in the future, especially if there is an economic slowdown. Some of the good habits of saving, paying down debt and living more frugal would serve Canadians well after the pandemic is over.