Canadians Need to Take Control of Their Debt

While some 70 percent of Canadians have an excellent to very good credit score, household debt has hit record levels this year. There are many reasons why more and more Canadians are borrowing heavily, including no and low interest offers, attractive interest rates combined with no monthly payments, and the recent financial crisis.

Why Take Control of Debt

Many borrowers have more than one loan to repay, including mortgages, personal loans, lines of credit, and credit cards. In times of economic growth and prosperity, monthly payments are not an issue at least for borrowers in the middle and high-income bracket. And the majority of borrowers fall in this category. In times of recession, interest rate increases, and rising unemployment levels, however, many people find it difficult to keep up with mortgage and loan payments (read more). Canada’s economy is red hot according to finance experts, eventually resulting in interest rate hikes and lower levels of employment. A shrinking job market could be bad news for many Canadians who are already heavily indebted (read more). At present, the average Canadian owes banks $1.71 for each $1 in disposable income. Income growth, on the other hand, fails to catch up.

In fact, a release by the Bank for International Settlements shows that China and Canada are at a higher risk of housing market and financial crisis mainly due to skyrocketing property prices and consumer debt. Reports also show that Canadians tend to spend a lot of money on non-essential items. The main categories include electronics (17 percent), hobbies and entertainment (24 percent), vacations and getaways (31 percent), house renovations (12 percent) and automobiles (45 percent). Vacations and entertainment fall in the category of non-essential spending as opposed to utilities, credit card payments, taxes, rent, and so on.

Positive Trends

While consumer debt is expected to increase in the short term, reports show that the delinquency rate is low and on a downward trend. In fact, the delinquency rate is just over 1 percent. This means that the majority of Canadians make timely payments, and just over 1 percent have past due payments and delinquent accounts. Statistics also show that some 30 percent of Canadians are totally or nearly debt-free.

The Downside

Still, Canadians need to take control of their finances and debt because reports show that 1 in 6 people ends up filing for bankruptcy. Figures show that some 120,000 – 150,000 borrowers file for personal bankruptcy or consumer proposal each year. People who opt for bankruptcy typically carry a high debt load of about $60,000, and this includes consumer loans only (not mortgage debt). And the number of young people who are filing for bankruptcy is on the rise according to a study by Hoyes, Michalos and Associates. In Ontario alone, insolvency rates for people aged 18 to 29 went up by 2 percent to 14 percent in 2016. Experts point to the fact that this trend is not unique to Ontario, and insolvency rates have increased across Canada. Student debt is the main culprit for this. Many graduates land low-paid jobs while struggling to pay off student debt. Released in 2012, a report by Statistics Canada shows that students carry a total debt of more than $28 billion. Many of them resort to payday loans to make ends meet, and close to 40 percent of those who file for bankruptcy use payday loans, secured credit cards, and other loans with high interest rates.