Credit card
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Declining interest rates have started to ease the pressure on household balance sheets, but insolvencies are growing and credit performance is deteriorating amid dimming growth prospects and weaker job markets, according to new data from Morningstar DBRS Inc.

In a new report, DBRS noted that the series of rate cuts from the Bank of Canada since mid-2024, which have taken the policy interest rate down to 2.75%, have started to alleviate some of the financial pressure on households.

For instance, the ratio of debt service to disposable income declined to 8.9% in the fourth quarter, down from 9.2% the previous quarter, it reported.

The debt-to-income ratio also declined as income growth outpaced household debt growth.

On a year-over-year basis, disposable income rose 7.9% in the fourth quarter of 2024, while household debt (including mortgages consumer credit and other loans) was up 4.1%.

Against this backdrop, the average consumer savings rate was high in the fourth quarter too, coming in at 6.1%, compared with the pre-pandemic level of 3.1%, the report said.

“The highest- and middle-income earners improved their average net savings,” DBRS noted, as inflation pressures generally eased — high-income earners also benefited from strong gains in investment income, while middle-income households cut spending, it said. 

However, credit performance has also deteriorated, with consumer insolvencies rising 6.1% on a year-over-year basis in the fourth quarter of 2024.

“The number of quarterly filings for consumer insolvencies has returned to pre-pandemic levels and may rise further as a result of the impact of the U.S. trade policy on Canadian economic growth and employment,” the report said. 

Additionally, the performance in securitized credit card portfolios continued to deteriorate, it noted, with credit card delinquency rates and average net losses on the rise.

While these metrics remain below their pre-pandemic levels, conditions are set to deteriorate further as the U.S. trade war weighs on economic growth and the labour market, while also stoking inflation.

“Potential layoffs and the rise in consumer prices would add financial pressure to already strained consumers, which would lead to higher delinquencies and potential losses in securitized pools,” the report said.