Conservative lending practices and regulations allowed Canadian banks to escape the worst of the writedowns faced by U.S. banks from the collapse of the subprime mortgage market. The lenders don’t have such protection for credit cards, aside from charging interest rates as high as 19.75% on outstanding balances, compared with a prime rate of 2.5% on loans to their best customers.

Krystal Koglin didn’t think twice when Toronto-Dominion Bank offered to boost the limit on her Visa credit card 11-fold a couple of years ago.

She went on a spending spree, hitting department stores like Holt Renfrew, treating friends at restaurants, splurging on designer jeans and buying “needless things” on eBay Inc.

“Being a young adult and irresponsible, I spent a lot of money that I shouldn’t have,” the 24-year-old salon manager and BCE Inc. employee in Toronto said. “I couldn’t handle having the responsibility of a $5,500 limit.”

Toronto-Dominion and other Canadian banks are suffering from a rise in credit-card losses from clients such as Koglin, who cut up her Visa card in December after skipping payments. Four of the country’s biggest banks set aside 51% more cash on average in the first quarter for card losses, and these costs may rise further this year, bank executives said.

“If there’s another shoe to drop, credit cards are going to be it,” said John Kinsey, who manages about $1-billion including bank stocks at Caldwell Securities Ltd. in Toronto. “It’s probably going to be the Achilles heel this year for the banks.”

Credit-card delinquencies and losses have risen with higher unemployment and personal bankruptcies, according to Moody’s Investors Service. Those trends will continue through 2009, even as issuers reduce credit limits and scale back on offers to entice clients.

Canadian card losses in the third quarter rose to 3.1% of average balances, the seventh straight period of year- over-year increases, according to Moody’s. By comparison, U.S. card losses rose to 6.6% of balances.

Canadian Imperial Bank of Commerce, the country’s No. 5 bank, set aside $152-million for card losses for the period ended Jan. 31, nearly double a year ago. Royal Bank of Canada earmarked $83-million, a 28% increase, while Bank of Montreal reserved $56-million for losses in its MasterCard portfolio, up 47%.

Canadian Imperial, Canada’s largest card issuer, is “slowing growth” of credit cards, says chief executive Gerald McCaughey. Cards were the second-biggest revenue generator for CIBC’s consumer bank in 2008, bringing in $1.75-billion.

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Canadians tend to let payments on their plastic slip before falling behind on other loans including mortgages and car payments, and lenders see a spike in credit card delinquencies as the “canary in the coal mine,” advisory services firm Deloitte said in a report released Tuesday.

“I think it’s an early indicator. But I also think that by acknowledging it and getting ahead of the curve, we can address the situation,” said Pat Daley, partner at Deloitte.

As the economy deteriorated, credit card delinquencies spiked by 5 to 10 per cent in October and November of 2008 from the same period the year before, according to interviews Deloitte did in December with a range of lenders. These included large chartered banks, regional banks, and foreign and single purpose lenders.

Losses related to writeoffs of unpaid customer debt rose from between half to a whole percentage point, which could represent up to $800-million for the industry as a whole, the report said.

In Canada the loss rate resulting from unpaid credit card bills has typically been in the 3 to 4 per cent range, lower than the rate of more than 6 per cent in the United States.

As of February, 2008, outstanding credit card balances in Canada were at more $80-billion, Deloitte said, citing newsletter The Nilson Report. Since 2004, credit card balances have risen by 40 per cent.

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