The Twin Problems of Credit Invisibility and Credit Deserts

Measuring Individual Financial Health in Canada

Canada is by all meaningful measures, an economically vibrant and prosperous nation. A member of the G7, Canada now boasts the world’s largest middle class as a ratio of total population.

Scratch below the surface, however, and a different picture emerges. Canada has the dubious distinction of being the only member of the OECD (the Organization for Economic Cooperation and Development comprised of developed countries) to have a ratio of consumer debt to Gross Domestic Product (GDP) greater than 1. That means, Canadian consumers owe more than the entire economy produces in a year. Compared that to the US (0.6), the picture of consumer debt burden is bleak.

Between 2009 and 2014, the percentage of Canadians using payday loans more than doubled from 1.9% to 4.5%. During that time, Canadians became the most indebted consumers among the members of the G7 (roughly, the 7 richest countries on earth), as household debt to income increased from 145% to 160%, and in 2017 hit a record high of 165%.

Similarly, Canadian citizens are generally asset poor.  A recent study by McGill Professor David Rothwell estimates that 55% of all Canadians are asset poor—that they could not cover 3 months of poverty level expenses if they suddenly lost their primary source of income.

Credit Invisibility

PERC Canada estimates that nearly 6 million Canadians are “credit invisible.” This population either has no credit report (no-file population) with a nationwide consumer reporting agency (TransUnion, Equifax), or has insufficient data in their credit report to generate a credit score (unscoreable population).

Credit Invisibles in Canada are mostly lower income persons, immigrants, members of minority communities (including First Nations), younger and elderly Canadians, and the unbanked and underbanked (nearly 1 in 5 Canadians). They remain financially excluded, and face considerable barriers trying to build assets and generate wealth by home or small business ownership.

Credit Deserts

Credit Deserts are geographies where there are above average concentrations of Credit Invisibles, above average concentrations of Fringe Financial Institutions (FFIs), and below average concentrations of mainstream lenders (members of the Canadian Bankers Association), below average household income, and below average credit scores.

While the Canadian Bankers Association (CBA) reports between 6,200 and 6,300 member branches between 2011 and 2015, the past two years have seen a decline in the number of branches (45 CBA member branches closed in 2016) as banking is increasingly done online.

Research shows that mainstream lenders have migrated from urban areas to suburbs, and that FFIs have replaced them (Simpson and Buckland, 2016).  It also shows that FFIs are booming in Canada.

According to Statistics Canada, more than 2 million Canadians have taken a payday loan. Of these loans, while most are low value, 27% are more than $1,0000 and 7% are more than $1,500. In addition, almost two-thirds (60%) of payday loan borrowers have taken out multiple loans within the three-year observation period, and a stunning 23% have taken out 6 or more during this period.

Given the combination developments: high levels of over-indebtedness, most Canadians being relatively asset poor (the OECD reports that just 44% of Canadians indicated an ability to cover existing costs for 6 months if income unexpectedly dries up), a shrinking mainstream bank branch footprint, and the growth and proliferation of FFIs—it seems highly likely that credit deserts are expanding within Canada.