There are some cases where aiming high is admirable; however, when it comes to Canadian household debt, the apparent sky’s-the-limit attitude towards credit is creating a slippery financial slope.
Recent data from Statistics Canada reveals that household debt in Canada has reached yet another record high in the fourth quarter of 2015, with an increase of 1.2 percent. They include mortgage and non-mortgage debt in those statistics.
Let’s break those numbers down by giving them some context in terms of household spending. What this increase means is:
- The debt to income ratio, which is a barometer of a healthy, manageable debt load, has increased. On average, every $1.00 that Canadians earn, they owe $1.65.
- Debt loads are growing nearly twice as fast as income. Debt grew 1.2 percent last quarter. Income grew 0.6 percent.
- According to Stats Can, households are contributing 13.8 percent of their disposable income towards servicing debt, up from 13.5 percent in the quarter prior.
“It only stands to reason that with more debt and less income, paying that debt down is becoming more difficult and will only get harder,” says Jeff Schwartz, executive director at the Consolidated Credit Counseling Services of Canada.
“Debt accumulation is often a slow and sneaky process that builds over time, until one day people literally wake up to find that they can no longer pay their debts. With low interest rates and the strength of a buy-now-pay-later consumer mentality, people often lose sight of the fact that they are, in effect adding to their debt load when they purchase, pulling the relationship between what they make and what they owe dangerously off-kilter.”
Commit to balance
Your debt to income ratio sets out reasonable limits for your household debt, based on what your income is. You need to commit to keeping that gap between your income and how much you owe wide.
You can either reduce your debt load, or increase your income. And unless you are a professional athlete, movie star or lottery winner, chances are your income is not going to skyrocket year over year. Prudence says attack the debts and commit to cash to keep the balances down.
Learn to say no
Want to turn this debt trend on its ear? Try saying no to spending and yes to savings.
Instead of buying an item now and then paying for it over time (and paying extra interest charges), try putting an amount away every month until you’ve got enough to cover it. Patience is a profitable financial virtue.
Expect the unexpected
Some people accumulate debt slowly as a means of paying for things. There are those who accumulate substantial debt load as the result of an unexpected life event. You can reduce that vulnerability by making savings a part of every paycheque.
It gives you a measure of control to keep the distance between your debts and your income.
Has your debt load crept up on you? Are you worried about your ability to pay your debts down? There is no time like the present to take control of your debt. Call one of our trained credit counsellors or check out our free online debt analysis tool to get started.