Canadian Bankcards: Delinquencies on Monoline Cards Are Rising
FICO's Canadian Bankcards Industry Benchmarking Trends for Q2 2024 show monolines delinquencies have reached pre-COVID levels
As we cross the halfway mark of 2024, the Canadian credit card industry finds itself at a pivotal point, marked by shifts in consumer behavior and the ongoing impact of economic pressures. A recent six-year review of Canadian credit card delinquency rates, particularly focusing on monolines (financial institutions offering only credit cards), highlights concerning trends that credit card issuers must address proactively.
Rising Delinquency Rates: A Tale of Two Stories
The data reveals that delinquency rates for Canadian monolines have not only surpassed pre-COVID levels but have remained elevated, signaling potential financial distress among these consumers. Before the pandemic, Monoline delinquency rates were already higher, averaging around 6.2%. However, post-COVID, these rates have surged beyond this benchmark, reflecting the sustained financial pressures that certain consumer segments are facing.
In contrast, delinquency rates for Canadian bankcards — those offered by institutions providing a wider range of financial products — have shown remarkable stability. Even though there has been a 7% increase compared to last year, these rates still remain below pre-pandemic levels. This divergence suggests that consumers with a broader financial portfolio are better equipped to navigate economic challenges, whereas those relying solely on credit cards are more vulnerable to financial shocks.
Consumer Behavior: Credit Card Usage and Payment Patterns
Another critical finding from the mid-year review is the shift in credit card usage and payment behavior among Canadian consumers. As of June 2024, the payment rate had dropped to 53%, a notable 4.8% decrease from the previous year. This decline indicates that consumers are paying less towards their credit card balances, likely due to increased financial strain. Concurrently, the average balance on Canadian credit cards has risen by 5%, continuing a trend that began in September 2022.
The trend of consumers paying a smaller percentage of their balances, coupled with fewer individuals paying their balances in full, underscores the growing financial pressure. As consumers struggle with higher living costs and rising interest rates, their ability to manage credit card debt is increasingly challenged.
FICO's Recommendations: Strategic Interventions for Financial Institutions
Given the current landscape, FICO advises that financial institutions take immediate and targeted actions to mitigate the risks associated with rising delinquency rates. Specifically, institutions should consider segmenting cardholders using advanced data analytics to develop tailored communication strategies. These strategies could include offering personalized payment relief plans to stressed customers or credit line increases to consumers who demonstrate a consistent ability to make monthly payments.
Additionally, the importance of enhancing digital interactions and self-cure tactics cannot be overstated. By understanding customer behavior in detail, financial institutions can stay connected with cardholders and provide the necessary support to navigate these challenging times.
Looking Ahead: Preparing for a Busy Season in Collections
The economic indicators from mid-2024 suggest that the remainder of the year will be demanding for collections professionals. The Bank of Canada's proactive approach to managing inflation, including potential interest rate cuts, points to an ongoing period of economic adjustment. However, these measures alone may not be enough to alleviate the financial stress that many consumers are experiencing.
For financial institutions, this means sharpening strategies and proactively preparing for increased activity in collections. By focusing on both preventative measures and responsive support, institutions can better manage the challenges ahead and assist their customers in maintaining financial stability.
Learn How FICO Can Help You Manage Credit Card Risk
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<p>FICO’s latest research on <a href="http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-the-beat-goes-on/" target="_blank">national FICO® Score distribution</a> shows that US credit quality continues to trend upwards, with an increasing number of consumers scoring in the highest scores ranges. Given that, we decided it was time to refresh our study on “<a href="http://www.fico.com/en/blogs/risk-compliance/infographic-what-does-a-high-credit-scorer-look-like/" target="_blank">FICO® Score high achievers</a>,” where we examine the credit behavioural profiles of consumers with higher credit scores.</p> <p>As expected, our latest study showed that older people generally have higher scores, as has been the case in our <a href="http://www.fico.com/en/blogs/risk-compliance/age-before-beauty-credit-worthiness-before-youth/" target="_blank">past research</a>. 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I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO<strong>®</strong> Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score.</p> <p><a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a></p> <p>Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li><strong>Credit history.</strong> Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li><strong>New credit.</strong> High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li><strong>Pay on time.</strong> As you might expect, the further in the past the delinquency, the higher the score – and that’s <u>if</u> a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. While 23% of the national population have collection items greater than $99, the figures are only 0.5% for the 800+ group and 3% for the 750-799 group. It is clear that, in conjunction with starting a credit file early, paying on time is a key trait of the FICO® Score high achiever.</li> <li><strong>Balance and utilization.</strong> Finally, we look at how credit is being used, focusing on revolving product use. (Since most people only have one mortgage or one auto loan, variation in instalment product figures is minimal and driven by payment history, which is near perfect for high scorers, as we’ve seen.) FICO® Score high achievers tend to have more open revolving accounts. While the % active trades and utilization are generally lower, by no means do high scorers avoid the use of credit products. What drives the difference here is the amount of <u>available</u> revolving credit utilized. The 800+ group is roughly 1/4 of the national median, both in total and on their highest utilized card; they also have lower balances and more cards<em>. </em>The 750-799 group is more active and higher utilized, but still only at 2/3 of the national figures. The young 750-799 group compensate with lower revolving balances and, as a result, lower utilization, which is in line with what we see for the 800+ group.</li> <li><strong>Benchmarks.</strong> I’d like to point out that while this study provides good benchmarks of the typical credit traits of the FICO® Score high achiever, individual credit profiles will vary widely. And keep in mind that when we sort groups of consumers as a whole by different behaviours, some results may look superficially odd. For example, the 800+ band has a longer median average open account time (128 months) than average revolving months on file (140 months).</li> </ul> So, what do we conclude? 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It ain’t rocket science!</p>
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