Canadians should consider the impact on their long-term purchasing power and credit scores, financial institution says
Financial institution Borrowell is warning of the potential threat posed by “revenge spending” once the economy fully restarts, which might hurt Canadians’ credit scores and purchasing power in the long run.
Borrowell estimated that Canadians accumulated $212 billion in savings during the pandemic, which was fully $184 billion higher than pre-COVID levels. However, with the gradual reopening of the economy, household spending habits in the near future are likely to lean heavily towards spending.
“Naturally, many Canadians will be increasing spending on food, clothes, social activities, travel, and more as the country gradually opens up to a new normal,” said Andrew Graham, co-founder and CEO of Borrowell. “But they should be cautious about ‘revenge spending’ after the past 16 months. Average credit utilization in Canada is already above the recommended rate of 30%, and this could increase even further as more and more opportunities to spend become available.”
Aggregated credit report data of over 978,000 Canadians showed that the average credit utilization rate is currently at 43.5%, while the average revolving balance is at $10,361. The implied average credit limit (revolving balance divided by utilization rate) is at $23,818.
Based on these benchmarks, Borrowell said that reaching a utilization rate of 30% or lower in the current climate would involve either reducing the average revolving balance by $3,215 or more while maintaining the same credit limit, or increasing the credit limit by $10,718 or more while not changing the balance.
“We encourage Canadians to manage their finances cautiously over the next few months,” Graham said. “Racking up credit card debt over the summer months can strain credit utilization rates and credit scores, putting long term financial goals at risk.”