Furnished with universal healthcare and the sweet, bilingual lilt of Céline Dion’s soprano, Canada has experienced its fair share of idealization by our neighbours to the south, particularly in recent years.
When it comes to some trends, however, it’s clear that Canada is following in the footsteps of the U.S.
“In the U.S., credit card collection efforts tend to be much more aggressive (and earlier in the delinquency process.) Canada tends to follow U.S. financial practices,” tweeted Scott Terrio, manager of consumer insolvency at Hoyes, Michalos & Associates Inc., back in February.
“I've noticed more aggression from certain banks & financial institutions as the credit cycle has turned.”
Terrio told LowestRates.ca that in recent months, he and his colleagues have noticed that creditors — including credit card companies, banks and mortgage lenders — have changed tack when it comes to customers who fail to make payments on time. Creditors are now pursuing customers earlier in the delinquency process. They’re also exercising more vigilance when it comes to delinquencies where relatively little money is at stake, which would have slipped through the cracks more easily in the past.
Terrio has seen customers report receiving calls from creditors as early as 30 days after missing a payment.
“If you’ve been paying someone for years, and you miss one payment, I’m not sure that the banks should be initiating a collections effort at that stage,” he says.
More aggressive collections efforts could have a big impact on Canadian consumers, many of whom are already struggling with mortgage payments, higher debt loads and insolvencies. If customers are behind on their payments, “it means their cash flow is dead and they probably can’t pay,” says Terrio. “Most people, as a lot of studies have shown, are living fairly closely to the edge of their monthly finances.”
If they can’t pay, they may be forced to file a consumer proposal, or even for bankruptcy. “Other than that, they’re going to find other ways to handle it,” Terrio adds. For example, “if you’re a homeowner and you’ve got some equity, maybe half your home equity [could be used] to pay your creditors off. And that means you’ve just [increased] the mortgage on your house, so you pay it longer term.”
But even that, he says, is an option that might be taken away as creditors continue to crack down on customers with outstanding debt.
Why the recent aggression, though? Terrio points to our current position in the credit cycle. A credit cycle includes periods where it’s fairly easy to borrow money due to lower lending requirements and low interest rates; it also includes phases where lenders are more reluctant to give out loans, prompting them to hike interest rates and tighten lending requirements.
Canadians are clearly in the midst of this second phase. After years of low interest rates, which lenders put into place to encourage spending — and therefore economic stimulation — following the 2009 financial crisis, lenders have progressively increased their interest rates over the past two years. Criteria for borrowers have also grown increasingly strict, especially when it comes to housing loans.
These limitations may have intensified even more due to recent developments in the Canadian economy, which has become more vulnerable over the past few months.
“You go back two years and all the financial news was a lot different than it was now,” Terrio explains. “Now you’re hearing banks are reporting earnings that missed their mark, or outstanding mortgage exposure. HELOC exposure is getting higher; there’s more consumer debt than ever.”
Only a few years ago, he says, banks “were lending like crazy.”
“The stats show that Canadian consumers were borrowing like crazy — they were two dance partners in lockstep. Now the fun is starting to be over because house prices are down in most areas, and [we’ve] had five [Bank of Canada] hikes.”
“Everybody’s getting nervous.”