Markets observers have been warning that Canadians consumers could slow their borrowing this year, dealing a blow to the country’s banks as a result. But analysts at Barclays Capital said Monday that bank profits are likely to stay safe from deleveraging — at least for now.

Concerns have been raised over the past few months about the damage a slowdown in consumer lending will do to Canadian banks. Canadians currently have one of the highest debt-to-income ratios in the world, and that ratio continues to grow. The Bank of Canada has repeatedly said it views this growth as unsustainable and that households will eventually be forced to pare debt levels.

John Aiken, analyst at Barclays Capital, said that while he does see an eventual slowdown in consumer borrowing, it doesn’t appear to be hitting bank profits this quarter.

“Almost everyone on the Street is expecting Canadian household deleveraging to have a negative impact on lending growth, coupled with continued pressure on margins,” he said. “However, after looking at the underlying trends in the quarter, we do not expect earnings to be nearly as weak as we had originally thought.”

Canada’s big banks finished reporting their fiscal first quarter earnings in late February and early March, with most posting higher profits from a year earlier. A few of the banks, including the Bank of Nova Scotia and Toronto-Dominion bank, raised their dividends.

But concerns have grown over how long profits can keep growing, especially given the reliance of banks on consumer lending. In February, PricewaterhouseCoopers warned in its annual bank review that a slowdown in consumer borrowing, due to sky high debt levels, would likely slam bank profits in the next 12 months.

“Potential earnings are inhibited by the fact that the industry is currently seeing smaller margins on loans and with a ceiling on consumer lending in Canada, the banks are not able to simply increase portfolios to maintain profits,” the report said.

But so far that hasn’t happened. Mr. Aiken points out that early data suggests Canadians are still as eager as ever to take on debt.

“While we continue to expect lending to slow down amidst consumer deleveraging and sluggish economic recovery, recent industry data from Canada’s banking regulator indicates that lending remains fairly resilient, with overall lending in February up 0.7% from January’s first quarter month end (personal lending up 0.4%, while commercial loan volumes up 2.4%),” he said.

Mr. Aiken comments are part of his update on the financial services sector in Canada, which he released Monday. While his views on the sector remain neutral (unchanged from his previous update), he did increase his earnings estimates for banks in the second quarter.

Paring Canadian household debt has been a strong theme among economists and the Bank of Canada this year. Governor Mark Carney has repeatedly warned that consumer debt poses one of the biggest domestic risks to the economy. Last month, he raised the alarm on household lines of credit, citing their rapid growth as one area that was catching the Bank’s attention.

John Shmuel

When Ray White’s son was 9 years old, he hit a tree branch while riding his bike. An ambulance whisked him to the emergency room. The boy recovered, but many months and phone calls later, White’s insurance company still had not paid the $200 ambulance bill. He finally decided it was easier to pay it himself.

By then, it was too late: The debt had been reported to the credit bureaus. It was only when he and his wife went to refinance their mortgage last month – nearly six years after the accident – that he learned the bill had shaved about 100 points from his credit score. Even with no other debts, a healthy income, and otherwise pristine credit, they had to pay an extra $4,000 to secure a lower interest rate.

Like White, people who fail to pay or respond to a medical collection agency in time – whether intentionally or not – may be surprised to learn, often much later, that it left a black mark on their credit record.

Consumer advocates say this is unfair. Medical debt is usually something people do not volunteer for, and billing errors and figuring out who owes what can often take months. According to the American Medical Association’s 2011 National Health Insurer Report Card, commercial health insurers processed 19.3 percent of claims erroneously in 2011, up from 17.3 percent in 2010.

Rodney Anderson, a mortgage banker in Plano, Texas, said he started to notice in 2008 that more customers were being hurt by these medical delinquencies. So he kept notes on 5,100 loan applicants over 10 months. He found that 2,200 had at least one medical debt that lowered their credit score, and many of them were unaware of the damage.

That prompted him to take the issue to Congress.

A version of the Medical Debt Responsibility Act, which would erase medical debts from credit reports within 45 days of being settled or paid, was approved by the House with bipartisan support in 2010. The bill was reintroduced in the Senate in March by Jeff Merkley, an Oregon Democrat.

Support for the bill comes from varied groups, including the Mortgage Bankers Association and the American Medical Association. “The current system punishes consumers regardless of the underlying facts,’’ the supporters said in an April 16 letter to lawmakers.

Tara Siegel Bernard

They were supposed to be wary of debt, but data show borrowing among U.S. consumers is growing again. A number of analysts and media outlets are hailing this as a sign of newfound “consumer optimism,” but a closer look at the numbers leaves little reason to cheer.

Though credit card debt has been decreasing, the latest data from the Federal Reserve, which exclude mortgages and home equity loans, borrowing for cars and student loans has soared. Overall, consumer borrowing outside real estate increased by US$8.7 billion in February of this year—topping a six-month upward trend that saw a staggering increase of US$18.6 billion in January.

The Associated Press notes that “consumers are taking on more debt at a time when their wages have not kept pace with inflation. And they are paying more for gasoline.”

Not that Canadians have anything to teach Americans here, but it’s still legitimate to ask: What does this mean for the U.S. recovery? It depends on who you talk to.

Some experts are celebrating the borrowing spree as a sign that consumers are “growing more optimistic,” as the New York Times’ Floyd Norris put it. He seems to belong to the camp that believes consumers will ultimately drive the recovery with their wallets. This group is even lamenting the fact that people aren’t using their credit cards enough.

Others, though, are taking the borrowing revival as bad news. Wasn’t too much household debt one of the main reasons for the Great Recession and the lacklustre recovery that followed? Analysts in this camp see lower credit card spending as a positive, but worry that savings still aren’t where they should be. As a recent report by CIBC noted:

“While the fog of [economic] uncertainty suggests that more money should be channeled towards savings, this has not been the case recently. Note that the decline in the savings rate during 2011 occurred against a backdrop of further decline in US home prices, increased volatility in the stock market and a slump in consumer confidence—all of which should have pushed the savings rate up, not down.” 

The authors point to a possible explanation: “With labour income on the rise and interest rates still extremely low, consumers are not feeling quite the pinch of financial obligations.” McKinsey Global Institute has also pointed to consumers not “feeling the pinch.” They reckon about two-thirds of the debt reduction in American households has come from debt pardon in the form of write-offs and foreclosures. In other words, many Americans didn’t really have to save up and pay their way out of debt—which might explain why dipping into the red again might not seem as spooky as it should for many people.

But the main reason to be skeptical of the “consumer optimism” view is that the borrowing spree has been driven by student loans, which, if anything, are depressing private spending. Ballooning student debt is the sign of a disappointing bet many Americans placed on higher education in hopes it would improve their chances in the toughest labour market the U.S. has seen since the 1930s. That’s why, when the crisis hit in 2008, colleges and universities across the country saw enrollment levels soar. But here we are in 2012 and half of those recent graduates are waiting tables at best. No wonder student loans have now become the latest focus of election-year squabbling between Republicans and Democrats.

Maybe this time America will have to find a way out that doesn’t go through people’s wallets.

Gabriela Perdomo

There’s a gap between America’s richest citizens and everybody else. And that gap has been growing larger for years.

No, it’s not income inequality. We’re talking about debt.

The vast majority of Americans are deeper in debt than ever, while the richest sliver of the population has actually seen its debt go down in the last 30 years or so, according to International Monetary Fund research recently cited by CNN. It’s not only bad news for the debtors themselves; this kind of pattern has emerged before, according to CNN — and each time, it was followed by a major U.S. financial downturn.

Debt has become an enormous problem for the typical American. Among the bottom 95 percent of earners — most of us, in other words — debt has risen to eye-popping levels. In 1983, the bottom 95 percent had 60 cents of debt for every dollar they earned, according to the IMF’s research. By 2007, it had risen to $1.40 of debt for every dollar earned.

For the top 5 percent, it’s been a different story. In 1983, that group had 80 cents of debt for every dollar they earned. By 2007, that had dropped off to 65 cents of debt.

And the spending patterns of the super-rich may only exacerbate debt gap between the rich and the poor. That’s because when the rich boost their spending, the poor follow suit, according to a March study from the University of Chicago’s Booth School of Business.

By any measure, working and middle class Americans have seen their debt balloon since the 1980s. Today, Americans owe some $704 billion in credit card debt, and more than that in both auto loans and student borrowing.

Wages have been holding steady for most U.S. workers over the past generation — but inflation has kept going up. As a result, by one estimate, consumer debt has risen 1700 percent since 1971.

Meanwhile, of course, the rich have only gotten richer, zooming ahead of the rest of the population with explosive income growth over the past three decades.

Alexander Eichler

America’s current average national credit score of 660 suggests that our credit health is failing.

Could the three-digit credit score number be to blame? With dozens of credit score models available, one survey found that 60 percent of consumers are confused about the scale of credit scores. If you’ve had a headache trying to understand your own credit score, pass the aspirin; you aren’t the only one.

Forty-two percent of Americans surveyed prefer credit letter grades to three-digit numerical credit scores, compared with 30 percent who prefer credit scores. Could an A to F letter grade system help consumers better understand their credit?

“The benefit to consumers receiving both the letter grade and score value is greater understanding of how they might be viewed by lenders,” says Barrett Burns, CEO and President of credit score provider VantageScore Solutions. While most credit scoring models rely on a three digit score range, the VantageScore model uses a 500 to 990 range along with a corresponding letter grade system; a score of 501 to 600 represents an F grade while 901 and up is an A grade.

A clearer understanding of their credit standing might also help consumers improve their failing grade to an A. “Moving to a grading system may help to diminish what I see as a ridiculous and unproductive amount of attention paid to point by point movements,” says Mitchell Weiss, Barney School of Business board member.

However, there’s a big reason why the credit industry isn’t likely to adopt a credit grade system: Credit scores are a thriving business.

“The companies that develop credit scores receive hundreds of millions of dollars a year selling their credit models. It is in their best interest to keep models and ranges proprietary,” says Ken Lin, CEO of CreditKarma.com, a site that provides free credit scores including the VantageScore.

In fact, the Consumer Financial Protection Bureau estimates the market for providing credit scores and reports has grown to more than $1 billion in revenue. Additionally, companies spend hundreds of thousands of dollars revamping their score models and marketing theirs as the best on the market.

With that much at stake, agreeing on a universal grading system in the marketplace would draw a stalemate. Case in point, Fair Isaac Corp., the company that created the popular FICO score, recently sued (and lost to) credit bureaus TransUnion and Experian for copyright infringement, claiming that the bureaus’ credit scoring models infringed on FICO trademarks including the range 300 to 850.

It’s a long-standing, lucrative debate of whose score is the true industry standard. The Consumer Financial Protection Bureau investigated the credit score marketplace to determine whether the myriad of credit score models — and the high price they cost — are beneficial for consumers. However, mandating a single score would mean the CFPB would choose winners and losers among the big credit scoring players, which is generally against federal policy.

So where does that leave us?

“Consumers want to be empowered about their credit,” Lin says. “They’re not interested in how they compare against other consumers or other models on a seemingly arbitrary scale; they want to know how their credit health is faring.”

Providing letter grades in addition to the complex three digit scoring range could go a long way to help consumers understand, and potentially improve, their credit. But first, the credit industry would need to acknowledge that it’s beneficial beyond the bottom line for consumers to understand their credit.

Convincing the financial industry to do something in favor of consumer interest? Hope you have a big bottle of aspirin; this headache may linger on for awhile.

Justine Rivero

Collecting information for the annual income tax ritual may have raised your awareness about how much you owe others.

A study by the Federal Reserve Bank of New York late last year indicates we seriously underestimate what we owe. In fact, many of us owe 11/2 to two times more than we think we do.

While reviewing your financial situation, watch for red flags:

» Your total consumer debts add up to more than 20 percent of your take-home pay. That includes car payments, credit-card payments, personal loan payments and medical payment plans, but not mortgage payments.

Avoid applying for a new loan if the additional payment would make you exceed that 20 percent benchmark.

» Your home mortgage payment (including principal and interest plus homeowners insurance and property taxes) are more than one-quarter to one-third of your gross income.

» What you owe is more than your net worth (excluding the market value of your house and your first mortgage balance).

Credit-card debt mounts up easily. Many of us hold more than one credit card, and recent studies indicate about half of us don’t know the annual percentage rate charged for the card we use most often. Being aware of that can make you less likely to use it so lightly.

What else can you do to manage your debt from here?

» Stop adding to existing balances. If you pay off all of your monthly charges each billing cycle, enjoy the reward points or other benefits you may receive.

» Get a handle on living expenses. Identify a portion of your monthly budget for repaying credit cards and personal loans.

» Target a specific card or debt to repay quickly. Pay the minimum monthly payment on the remaining cards until this one is paid off.

» Keep it up. When you have paid off all of your consumer debt, begin working on your mortgage or begin a disciplined investment program.

For more debt-management strategies, see the Federal Trade Commission website at: www.ftc.gov.

Walter L. Koon Jr

Millions of consumers across the country are still dealing with large constraints such as significant amounts of credit card debt, but more now recognize some of their biggest problem areas when it comes to managing their money and financial lives correctly. More than half of consumers – 56 percent – say that they believe their biggest financial problem area, and the one in which they could use the most help, is knowing what it takes to improve their credit score, according to a report poll from the National Foundation for Credit Counseling. Problematically however, while many recognize that their credit scores can play a significant role in all aspects of their personal financial life, they don’t do enough on their own to make sure they’re in good standing. Most respondents said they hadn’t checked their credit report at any point in the last 12 months, but only 5 percent said they thought they needed help understanding the information contained in thedocument.
This type of disconnect indicates that consumers simply might not know that the information on their credit report is what’s used to comprise their score, NFCC spokesperson Gail Cunningham said. That’s why experts usually advise that it takes ordering a credit report to understand what’s wrong with a credit score.
But consumers weren’t only concerned about their credit standing, the report said. Another 23 percent of those polled said they think their biggest problem area is that they need to get their spending under control, and another 11 percent said they would like to have a better grasp on how to put more money into savings. Experts say that these two types of behavior combined can lead to serious financial problems because stretching budgets thin with overspending, and having nothing to fall back on in the event of an emergency, can lead to massive balances that can be difficult to get under control again.
Consumers who run into large amounts of credit card balances and other bills often find themselves in need of debt relief. Since the end of the recent recession, however, many consumers have been conscientious in their efforts to pay down their debt and make sure they don’t carry a balance from one month to the next.

Debtmerica

While you’ve been pretending to read the fine print on everything from your cell phone contract to your Starbucks card, companies have been slipping in legalese that robs you of your rights. A little-understood but rapidly expanding practice called “mandatory arbitration” is replacing your right to sue a company in court — a right many of us probably never even realized was vanishing.

On Tuesday, the Consumer Financial Protection Bureau announced an inquiry into arbitration clauses in contracts for financial products and services. These clauses have become ubiquitous and lurk in contracts and in the terms and conditions for all types of products and services, from credit cards to retirement account agreements to nursing home admission forms, and even show up in some employment contracts.

“Consumers may not realize that they have waived their right to a trial because of an arbitration clause,” the CFPB says in its release about the inquiry.

For the time being, however, even if people do realize that they’re being asked to sign away their right to a day in court, there’s little they can do about it. When you open a credit card, sign up for cell phone service or any other commercial activity, you don’t get to write the contract terms: the company does. In some cases, you don’t even have to sign a contract to give up your rights. The terms and conditions on the Starbucks website, for instance, says that customers are agreeing to arbitration automatically when they buy a gift card from the coffee giant.

So what is arbitration? It’s basically a substitute for a court case, but it’s skewed heavily in favor of the companies that mandate it. Instead of going in front of a judge, you present your side of the story to an arbitrator — one the company gets to pick. “Arbitration companies treat large corporations as their clients,” Public Citizen says. They don’t have to take legal precedent into account when deliberating, and their decisions aren’t made public. Public Citizen has calculated that 94% of all arbitration disputes get resolved in favor of the company. Unlike the court system, there’s no way to appeal a ruling.

The proliferation of these clauses stems from a Supreme Court ruling last year which said, essentially, that companies can legally prohibit customers from joining forces and filing class-action lawsuits against them. Instead, companies could mandate that customers have to submit to arbitration if that’s what the contract says. Not surprisingly, companies have been rewriting their contracts to include these clauses at breakneck speed, say consumer advocates.

“The net effect of all this is American consumers’ right to hold a company accountable in the courts is basically gone,” says Harvey Rosenfield, of counsel with nonprofit group Consumer Watchdog.

At this point, the CFPB says specifically that it’s not looking to rein in or prohibit the use of arbitration or arbitration clauses. But it wants to get a handle on how prevalent they are and how they affect consumers. It’s also just focusing on financial contracts, but its findings could be useful for extrapolating how widely used these clauses are in other industries.

Martha C. White

Consumers have the memory of an elephant when they feel like they’ve been wronged by a credit card company. Much more so than other service providers like grocery stores or even health insurers.

Maybe that’s because of all the debt credit card customers are piling up – and are exhaustingly trying to pay down. According to the Federal Reserve’s March G.19 Report, U.S. consumer revolving debt (primarily credit card debt) dipped below the $800 billion level, to $798.6 billion, a 3.3% drop for the month of Feb. 2012. That’s the second-lowest debt level since Oct. 2004.

Both January and February saw declining credit card debt, as opposed to 2011, when revolving debt largely rose on a month-to-month basis, the Federal Reserve reports.

Altogether, U.S. consumer credit card debt has fallen from $957 billion in 2008 to $798.6 billion today. Yet a new study shows that credit card consumers are still seething about all that debt, and how they perceive to have been treated by card issuers (especially over issues like late payment fees, pullbacks on rewards programs and higher interest rates).

The study, from Temkin Group’s 2012 Forgiveness Ratings, says the credit card industry is the industry least likely to earn “forgiveness” from consumers.

The Forgiveness Ratings tracks consumer sentiment on 18 industries, and 206 specific companies, including retailers, parcel delivery services, airlines, banks and credit card companies.

What did the 2012 rankings find? Primarily, that industries like insurance carriers, investment firms, banks and fast food chains all ranked well ahead of credit card firms in terms of the all-important “forgiveness” factor.

As Temkin puts it, “Every company makes mistakes now and then, but how willing are customers to forgive the company when it happens? Forgiveness is a valuable asset that companies earn by consistently meeting customers’ needs.”

According to Temkin, that forgiveness factor is calculated in three ways:

• Functional: How well do experiences meet customers’ needs?
• Accessible: How easy is it for customers to do what they want to do?
• Emotional: How do customers feel about the experiences?

Apparently, credit card companies failed on all fronts, as consumers reacted strongly against forgiving carriers for what they perceive to be toxic business practices.

Common gripes by consumers against card companies are shadowy and onerous rate changes, “gotcha” late payment fees and penalties, and the harsh reality that, every month, a credit card bill reminds the consumer of purchases long since passed but not yet paid.

Taken together, those issues tend to breed resentment among consumers toward card providers, and that’s exactly what the Temkin study seems to be saying.

For the record, grocery store chains, appliance makers and retailers topped the list of “forgivable” industries, according to Temkin. Joining credit card issuers at the bottom of the list were health insurers, cable and Internet providers and banks.

Brian O’Connell

Each of the last four years, the number of consumers who’ve reported spending more than in the year before has steadily risen, according to the National Foundation for Credit Counseling’s 2012 Financial Literacy Survey. On the one hand, this trend reflects the continued economic recovery. However, it also speaks to the trouble people are having letting go of housing-boom spending as well as the record debt being racked up as a result. U.S. consumers incurred $48 billion in credit card debt during 2011 alone, according to a Card Hub study, which leads us to two obvious conclusions: 1) We need to pay down what we owe and 2) We must find a way to stay out of debt moving forward.

Paying Down Debt

As far as attaining debt freedom goes, consumers have a familiar ally: free balance transfer credit cards (i.e. 0% balance transfer credit cards that do not charge balance transfer fees). These cards actually disappeared following the CARD Act’s prohibition of the tactics that allowed credit card companies to revoke consumers’ 0% introductory rates as a result of any misstep, no matter how small. And while the reason for their return remains unclear, it doesn’t really matter.

Free balance transfer cards can save you hundreds in interest by allowing you to allocate the entirety of your monthly payment toward the principal for more than a year. For example, if you’re revolving around $7,000 in credit card debt and have a 12% interest rate – as the average consumer does, according to the Federal Reserve’s most recent G19 Report – then a free balance transfer would save you more than $800 over the next 12 months if you pay $100 each month.

The best free balance transfer offer currently on the market is the No Balance Transfer Fee Slate Card from Chase. It offers 0% on both purchases and balance transfers for 15 months and obviously does not charge a balance transfer fee.

Obviously, the savings you’ll garner via use of this card depend on your monthly payments as well as how much debt you have remaining after 15 months. That’s where a credit card calculator becomes handy, especially when you consider that all 0% cards have high regular interest rates. You can’t assume that you’ll be able to transfer your remaining balance to another balance transfer card because as many people learned during the Great Recession, they’re not always there when you need them.

Staying Out of Debt

Remaining debt free hinges on developing a budget and sticking to it. Start by rank ordering your monthly expenses and cutting those that are least important until your outlay is at the amount you’ve determined you can afford to spend. In doing so, be realistic and consider your current income, not the income you had prior to the financial downturn. While it might be tempting to assume everything will go back to “normal,” if your income was at all tied to the housing bubble, it’s not going to return to pre-recession levels. After establishing a budget, you can either ask your credit card company to lower your limit to this budgeted amount or set up balance alerts.

A helpful strategy for recognizing when you are spending beyond your means is to open a credit card specifically for everyday expenses. If ever finance charges make their way onto this card’s statement, you’ll know it’s time to cut back.

Ultimately, given the cost and stress associated with debt, taking the aforementioned steps to avoid it is a small price to pay.

Odysseas Papadimitriou