Credit cards are the new emergency fund.

A story told by the latest batch of debt statistics is that people are increasingly using their credit cards to pay for living costs. Card balances are rising, and the amount being repaid each month is shrinking. The biggest strain is seen in people with the lowest credit scores, an indicator they live close to the edge in a financial sense.

We could easily talk here about how important it is to have an emergency fund to help you through tough times, but aren’t we past that after two years of high inflation and interest rates? If you don’t have an emergency fund today, it’s likely because you’ve already drained it or couldn’t afford to start one.

This brings us to credit cards, the discreet, ever-available problem solver for people who need money quickly. We should understand the economics of credit cards because we’re going to be hearing more about them if the economy keeps slowing.

The Bank of Canada’s trendsetting overnight rate was left at 5 per cent last week, the prime lending rate used by banks is 7.2 per cent, and vehicle loans are as high as 8 per cent these days. Credit-card rates are 21 per cent for reward cards and almost 13 per cent for “low-rate” cards. You have to view the rise in credit-card debt against this backdrop.

The credit-reporting company Equifax Canada reported last week that total card balances hit an all-time high of $113-billion in the third quarter of this year, a year-over-year increase of 16 per cent. More than six million new card accounts were opened in the past 12 months, up 13.7 per cent from 2022 levels.

Immigration helps explain the rise in the number of cards and total card balances – new Canadians are getting credit cards, just as they should to establish a credit history they can use to apply for mortgages.

But Rebecca Oakes, vice-president of advanced analytics at Equifax Canada, said the rising cost of living, high interest rates and the slowing economy also explain why card use is rising in ways that suggest household financial strains.

“People are using their credit card more because that’s the only way they have to making some of their day-to-day living expenses,” Ms. Oakes said.

Equifax says the average balance on cards reached $4,119 in the third quarter, which exceeds prepandemic levels and compares with $3,727 in the same period of 2022. The amount people are paying on their cards each month has grown as well, but it hasn’t kept pace with spending increases.

The most alarming numbers on card debt involve people with credit scores below 620, a key threshold in assessing your record as a borrower. Their average card balance in this group jumped almost 14 per cent on a year-over-year basis and is up 9.4 per cent from prepandemic levels.

Ms. Oakes said that about 66 per cent of cardholders pay their balances in full every month, compared with 60 per cent before the pandemic. This improvement highlights the income-inequality narrative of credit cards. Some people came through the pandemic in better financial shape than ever, while others are struggling with the cost of groceries, mortgages and more.

There are worse financial survival tactics than putting expenses you can’t afford on your credit card, specifically payday loans. But the interest penalty for carrying a card balance for an extended period is horrendous. If you paid the minimum on the average card balance, it would take almost 21 years to pay your balance in full. The interest bill would be $5,645.

The reason credit-card interest is so high is that it has to compensate card issuers for charge-offs, an industry term for card debts that are written off as a loss. High rates keep the economics of the card business in balance – they allow for big profits for card issuers and rewards for card users in the form of travel points or cash back.

All of this means families pressured by high mortgage rates are helping to pay for your travel rewards. Small businesses paying fees to credit card companies also finance your rewards, although the federal government has reached a limited deal with Visa and Mastercard to lower transaction fees for very small businesses.

I’m an avid credit-card user myself. But I recently wavered in one particular store and ended up paying by debit. Debit feels like cleaner money.

The Globe and Mail, December 11, 2023