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Household debt levels up, signaling increased cash counter use

Household debt levels up, signaling increased cash counter use

If there's ever been a time for Canadians to start using currency, including polymer notes more regularly to pay for purchases, it could be today, new data suggests - a recommended payment method sure to have retailers reaching for their dual-purpose cash and cheque scanners.

Household debt levels are on the rise nationally, particularly in Ontario, Canada's most-populated province. The typical household owes around 5.6 per cent more in back payments today than in 2010, according to estimates from the Financial Accountability Office of Ontario. That's a growth rate that is more than 2 per cent faster than what consumers have gained in disposable income over the same period.

More specifically, in 2016, the average four-person Ontario family had about $154,000 in debt, based on the FAO's calculations. That's up from the $119,000 the typical household had in unpaid expenses six years earlier.

A substantial portion of what Ontarians owe stems from their mortgages. Indeed, between 2010 and 2016, home loan debt rose 6.5 per cent, according to the FAO and Statistics Canada. Non-mortgage debt also intensified - and at a faster pace than disposable income - but at a slower rate (3.9 per cent).

With the Bank of Canada raising short-term interest rates - and expected to continue doing so in 2018 now that the economy has improved - the FAO forecasts household debt loads to rise further.

Debt forecast to rise to highest point since 1990

As a share of income, 15.3 per cent will derive from outstanding payments by 2021, the FAO stated in its outlook. Debt represented 13.6 per cent of household earnings in 2016. Should the FAO's forecast prove to be accurate, it would be the largest debt service share in more than a quarter-century.

Luan Ngo, the FAO's director, indicated that the significance of the increase largely depends on what the central bank does, raising rates slowly or sharply.

"The FAO estimates that, if interest rates were to rise 100 basis points higher than projected by 2021, average debt payments would increase by a further $1,000 per household, equivalent to about 1 per cent of household disposable income," Ngo explained. "This would likely force households to scale back spending on goods and services, and could have significant negative implications for the broader economy."

Many financial experts urge clients to reduce or even entirely eliminate credit card payments to get out from under debt. Instead, they recommend making greater use of cash because it forces buyers to identify just how much they're spending.

Less costly purchases have helped keep retailers' cash counters busy. According to a 2015 report from the Bank of Canada, consumers overwhelmingly opt for buying with paper currency for items or services $20 or less.

January 31, 2018