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Many Canadians in the dark on minimum debt payments

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Canadians who regularly make more than the minimum payments on their debt are less likely to fall into delinquency – but more than a third of consumers aren't certain about the benefits of paying a greater amount, according to research released Wednesday by TransUnion.

The global survey included 1,010 responses from Canadians, 88 per cent of whom said they frequently pay more than their minimum monthly requirement for credit cards or similar revolving debts like lines of credit.

But 39 per cent of the Canadians surveyed weren't certain about the benefits that come with making more than the minimum monthly payments on their debt. In the U.S., this uncertain proportion of the population is lower at only 25 per cent.

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TransUnion, a credit-monitoring agency based in Chicago, suggests that the trend-focused data could paint a more accurate picture of consumers for potential lenders than traditional credit reports, which capture consumer data at a single moment in time. That is, it better recognizes a consumer's ability to pay down debt rather than simply apply a number to what they owe.

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If more Canadians recognize this and boost their minimum monthly payments, TransUnion says, it could make more favourable rates and terms available to a wider swath of the population.

The survey comes at a time when low interest rates have Canadians holding record amounts of debt. In the third quarter of 2016, Statistics Canada found that households in this country owed $1.67 for every dollar of disposable income.

Debt can be an important tool for building wealth over time, but "using debt as a part of cash flow is only helpful when you can pay it down," says Andrea Thompson, a senior financial planner with Raymond James Ltd.'s Coleman Wealth in Toronto.

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Ms. Thompson says the survey results demonstrate the need for cautious debt management as part of a broader financial plan, which is more prudent than dwelling on credit scores. "The most important thing is to use your debt as a tool when you need it, but not to use it exclusively when you're looking at how to build your wealth," she says.

Brandon Hill, a certified financial planner and founder of A Life of Wealth advisory service in Toronto, often works with young clients, for whom credit scores can seem mysterious.

"They often have the misconception that as long as you pay off your minimum balance, your credit score will never be affected," Mr. Hill says. "And while that might be true, we're not just looking to maintain the status quo. What you want to do, especially as a younger person, is enhance that credit – pay off more, pay down debt faster."

TransUnion has incorporated the real-time trended data into its Canadian credit-score offerings since 2015. Using a metric called "total payment ratio," or TPR, it attempts to correlate payment amount and delinquency. It's calculated by dividing consumer's total monthly debt payments across their credit cards by the minimum required.

The higher the TPR, the less likelihood of delinquency: someone who pays $1,000 when the minimum that month is $200, for instance, has a TPR of five. TransUnion's study found that higher TPRs are correlated with lower delinquency rates, both for credit cards and auto loans.

As such, the company suggests incorporating these metrics into credit-score calculations could increase the proportion of consumers in the high-end "super prime" category to 21 per cent, up from 12 per cent, allowing them to borrow with more favourable terms and rates.

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"This may sound intuitive: consumers who are able to pay more usually have more liquidity and therefore are less likely to miss payments," said Ezra Becker, Transunion's senior vice-president and head of global research, in the press release. "But it is the quantification of this intuition that is important. This is an insight one can only derive from trended data that includes actual payment data, and it can be an important variable for lenders to use when assessing the risk of their credit portfolios."

Domestically, TransUnion Canada competes with Equifax Canada for credit reports. Equifax has also begun incorporating trended data into credit-score calculations; in January, its global parent company released a similar analysis suggesting that trended data could give 1.5 million consumers better access to credit each year.

Credit scores are mathematical formulas based on an individual's credit report. A score can range from 300 to 900. Credit scores measure a consumer's ability to pay down debt, assessing among other things their history with credit and current indebtedness. Lenders use credit scores and reports to assess the terms and rates they assign a person – or if they should lend the person money at all. This can affect everything from credit-card limits to the ability to get a mortgage.

The TransUnion survey was conducted with Modus Research and public-relations firm Weber Shandwick. It was based on a random sample of 1,010 Canadians aged 16 or older, and was weighted by age, gender and region.

Across Canada, 44 per cent of respondents said they paid their full credit-card balance each month, while 9 per cent pay just the minimum.

Among the provinces, consumers from Ontario and British Columbia said they were the most likely to only pay the minimum for monthly credit-card payments – 27 per cent and 20 per cent of respondents from each province, respectively.

The survey also found that 56 per cent of Canadians weren't familiar with how their credit score was calculated. In Manitoba and Saskatchewan, that number reached 69 per cent – the highest in Canada.

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About the Author

Josh O’Kane is a reporter with The Globe and Mail's Report on Business. Since joining the paper in 2011, he has told stories from New Brunswick to Nairobi. In his spare time, he writes about music and the industry around it. More

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