Debt is the new normal in Canada.
By the second quarter of 2024, total consumer debt in Canada hit $2.5 trillion, according to Equifax Canada. And that has nothing to do with having a mortgage.
That’s a lot of cash to owe to creditors, especially when you’re talking about unsecured debt. Unsecured debt usually has a higher interest rate because your creditors cannot seize an asset if you default.
Furthermore, people look to credit cards when the cost of living outpaces their income. If you are a newcomer to Canada, a credit card is one of the first things you get in order to start building your Canadian credit score and credit history.
So, what are the reasons why debt in Canada is so high?
Key Points
- Non-mortgage consumer debt in Canada is increasing and is now at a whopping $2.5 trillion.
- Factors like inflation, missed loan payments, excessive spending, and high credit card debt contribute to mounting consumer debt among Canadians.
- Certain steps can get you out of debt, including spending only what’s in your bank account, keeping your credit utilization ratio low, making timely bill payments, and saving up for an emergency.
Top Reasons Canadians Are in Debt
Is it a lack of financial education that’s causing such high consumer debt, or is it something else? Here are some of the more common reasons why Canadian consumers find themselves in debt.
1. Inflation
Inflation is eating away at disposable income in Canada. It may have started with sustained gas price spikes starting in May 2009, but the COVID pandemic did not help. For a time, it cost more to produce and deliver goods to store shelves. That included the price of supplies as well as salaries.
As of September 2024, the inflation rate is around 2.0%.
Unfortunately, inflation affects the cost of food and rent, too. Food prices went up so significantly that the federal government introduced the one-time Federal Grocery Rebate to help low-income Canadians.
At the same time, a housing crisis and higher interest rates make rent almost unaffordable in major centres. Right now, interest rates for 5-year fixed-rate mortgages are nearing 5%. And in urban centres like Toronto and Vancouver, the median rent is $2,500 and $2,800, respectively.
2. Household Debt
Now, this one is partially outside a regular person’s control. When inflation is out of control, governments step in to cool it by raising interest rates. Unfortunately, rising mortgage interest rates put Canadian budgets in trouble.
According to Statistics Canada, Canadians are $2.162 trillion dollars in residential mortgage debt from chartered banks and non-bank lenders. Monthly variable mortgage payments cost more now, as well as lines of credit.
Canadians are biding their time and monitoring interest rates. Those with mortgages up for renewal might consider shorter fixed-rate terms. It is a wait-and-see approach, betting on the hope that rates will go down after 2 to 3 years. However, many Canadians may be faced with the dreaded “mortgage cliff” when renewing their mortgages at much higher interest rates compared to the rates they originally locked in at.
Of course, if you need cash to pay more toward your mortgage, it is really easy to push your non-mortgage expenses ahead a month. That usually means using credit cards.
3. Credit Cards You Do Not Pay Off Each Month
We’ve already briefly touched upon the credit card issues, but it is certainly worth mentioning more than once. Perhaps the most prevalent and common reason for consumer debt is the overuse and abuse of credit cards.
Credit cards are not inherently bad. They serve a purpose: a convenient way to spend money without having to carry cash. Most credit cards have valuable insurance, roadside assistance, and fraud protections that you don’t get by paying cash.
Furthermore, credit card points are rewards created new forms of currency, or cash equivalents. In a way, it makes you stretch your money further if you can use points for travel or bill payments.
The problem is the high interest rates for cash advances or unpaid balances. If you cannot pay off your monthly credit card bill on time, you go into high-interest debt.
Credit card interest rate can be as high as 22% or more, and when the outstanding debt load increases, the interest amount paid can be astronomical.
Unless you get a handle on this debt and pay it down religiously, you could wind up with credit card debt that is a lot more than you can handle.
If you want to learn more about how to consolidate your credit card debt, just click the button below.
4. Missed Payments On Loans
Even one missed payment on a personal loan or a car loan can put you in a precarious situation with your finances. With each missed payment, your outstanding debt load continues to inch higher. Eventually it becomes difficult for you to pay down.
And with every missed payment comes a late fee that’s tacked on to what you already owe, bringing your debt even higher than it was before.
5. Spending More Than You Can Afford
This sounds pretty obvious, but it’s worth mentioning. Not every Canadian has a budget. Not every person knows their monthly income versus their expenses. Worse, some do know they are overspending but do not care.
People like to have nice things, go to restaurants, go places, and travel. But not everyone can necessarily afford what they want, but they spend like they can anyway.
If you spend more money than you actually bring in, you can certainly expect your debt load to mount. Unfortunately, many Canadian consumers find themselves in this position, which is another common reason for mounting consumer debt in Canada.
If you spend more than you make, you can definitely expect your debt to rise. If you cannot get out of debt, you might consider a debt consolidation loan, a consumer proposal, or bankruptcy.
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6. Not Having A Financial Cushion To Fall Back On
It’s always wise to have a little bit of money saved and tucked away somewhere in case of a rainy day. An emergency fund is fundamental to your financial health. Just knowing you have the extra funds reduces your stress.
The unexpected can always happen, and it’s always important to be prepared.
If you’re not, you could be scrambling to take out payday loans with exorbitant interest rates, borrowing money from friends or family, or racking up your credit card to cover unexpected expenses.
7. Not Being Disciplined With Your Money
When it comes to money, you absolutely need to be self-disciplined and responsible with every dollar you have in your pocket.
That doesn’t mean being cheap or denying yourself some fun. Remember, managing your money or staying out of debt relies on consistency. Your motivation is always changing, but if you are consistently reviewing your spending or putting money toward your necessities, you can come out ahead.
For example, if you consistently try to pay off your credit card each month, that does a lot to keep your consumer debt low or non-existent. If you’re not responsible with your money and your credit, you can quickly and easily see your outstanding balance grow to the point of no return.
How to Avoid These Debt Traps
So, now that you know what can get you into financial trouble, how can you avoid getting stuck in these predicaments? Here are a few suggestions.
Only Spend What You Have In The Bank Or On A Secured Credit Card
Spending only what you have does not mean giving up plastic. You can easily use a secured or prepaid card instead of cash. However, a secured or prepaid card only lets you spend up to a certain amount.
That amount is your deposit, which is cash you have already. You are not borrowing from a lender and using revolving credit.
Don’t Spend More Than 30% Of Your Credit Limit
If you do use a credit card, don’t use more than 30% of its credit limit. Doing so will not only make it much more difficult to pay down the balance (as well as the interest portion on top of that), but it could also negatively impact your credit score.
Keep your credit utilization down to make it easier to pay off your credit card bills in full every month while also keeping your credit score in check.
Make Your Bill Payments On Time
Forget about having to pay late charges on missed payments. Instead, make sure every bill is paid on time and in full every month. Not only will this help you stay on top of your debt, but it will also help to keep your credit score healthy.
Save For Your Emergency Fund
Having a financial cushion to fall back on can be a real lifesaver when the time comes. Try to save up about 3 to 6 months worth of all the bills you usually have to pay every month just in case you lose your job, suffer a medical emergency, or your car breaks down, among other things.
How Does Consumer Debt In Canada Vary By Age Group?
The average amount of consumer debt that Canadians carry varies by age. Generally speaking, consumers between the ages of 35 to 44 tend to have the highest amount of debt. Overall, this age group carries an average total debt (including consumer debt and mortgage debt) of $541,851. As Canadians age, the average amount of debts decreases.
The following chart breaks down different age groups and the average amount of different types of debt for each:
| Under 35 Years | 35–44 years | 45–54 Years | 55–64 Years | 65 Years+ | |
| Consumer Debt | $47,173 | $67,041 | $84,720 | $79,060 | $42,025 |
| Mortgage Debt | $304,631 | $466,776 | $434,090 | $216,873 | $85,051 |
| Student Debt | $17,315 | $8,034 | $6,247 | $6,468 | N/A |
What Can I Do To Get Out Of Debt?
If you have mounting debt that you’re having trouble getting rid of, there are several options to consider.
Budget
One of the first things you should do before resorting to more aggressive measures to get rid of debt is to come up with a budget. Make a list of all of your monthly expenses and add them up. Then, compare your outgoing expenses to your total monthly income.
If you’re in the red, it’s time to make some adjustments, either to your spending habits or to your income, or both.
To make things easier, consider using one of the many budgeting apps available, like YNAB, KOHO, and MyDoh. Some are free to use, and others charge a nominal monthly fee. Budgeting apps make it easy to get and stay organized with your finances and help you stick to your budget.
Debt Consolidation Loan
While adding more debt to the pile may not be ideal, applying for a debt consolidation loan is a bit different. The goal is to reduce the amount of bill payments you have to make every day or shrink your monthly payment amounts.
With a debt consolidation loan, you can use the funds to pay off all your debts, including high-interest debt. Then, you’ll be left with one loan instead of multiple loans. Ideally, you can secure a lower interest rate with your debt consolidation loan so you’re paying much less in interest overall. In this way, you’ll be saving a lot of money and can use the freed-up funds to pay down your existing debt much faster.
Debt Management Program
A debt management program is designed to help you lower your monthly debt payments and ensure that you continue to pay off your lenders. This process is facilitated through a credit counselling agency that till contact all your creditors and negotiate more affordable payment terms on your behalf. Then, your debts will be lumped into one single debt that is repaid through the debt counsellor.
Consumer Proposal
If other options have not worked for you to whittle down your debt, you may consider a consumer proposal. This is a legally binding process that will be noted on your credit report and will affect your credit core. For this reason, you should only take this step if you’ve tried other options.
A consumer proposal involves working with a Licensed Insolvency Trustee (LIT) to handle your debt. Your trustee will help you come up with a debt repayment plan to pay off your creditors. Usually, the plan involves either paying a portion of debts in installments, extending your loan payment term, or a combination of both.
In order for a consumer proposal to work, it must be accepted by more than half of your lenders. Once the proposal starts, all debts covered by it will freeze and your creditors won’t be able to take any action against you to recoup what is owed. Then, you’ll repay your debt through your trustee.
Bankruptcy
As a last resort, bankruptcy may help you deal with your unmanageable debt. However, bankruptcy will significantly affect your credit for years, making it nearly impossible to take out additional loans or credit products during that time.
Like a consumer proposal, bankruptcy involves working with a LIT who will help you file for bankruptcy. During this process, your debts will be frozen and any actions initiated by creditors against you will stop. Once you’ve been discharged from bankruptcy, you will need to start building your credit.
Final Thoughts
There’s a trend across Canada when it comes to growing household debt. Don’t be part of this trend, as it will do nothing but bury you in debt that you’ll find extremely difficult to climb out of. If you are currently having trouble dealing with your debt, Loans Canada can help. We’ve helped thousands of Canadians just like you pay down their debt and get back on track to a healthier financial future.
