Canada’s debt crisis is becoming a threat to the country’s economy. According to Canada Statistics, the debt-to-income ratio of most Canadians increased in the fourth quarter of 2018 after the debts slightly outpaced the growth in income. The looming household debts result from the unprecedented number of people who borrow more than what they earn.
In March 2019, the Bank for International Settlements’ (BIS) quarterly review stated that Canada’s risk to fall in a debt crisis dropped significantly over the previous year. However, out of 75% of Canadians are still living in debts, and 31% claim that they don’t have enough money to cater for their needs, putting the country at a higher risk of a debt crisis.
Why Many Canadians are in Debt
An average Canadian has a consumer debt of about $8,500, excluding mortgages. About 14% of Canadians have consumer debts between $10,000 and $25,000, while 14% have debts of more than $25,000. The credit card debts contribute the most significant percentage to household debts in Canada.
Now, let’s delve a bit deeper into some of the factors that contribute to high consumer debts in Canada.
High Living Costs
Most Canadians go into debts not because they are spendthrift, but to get money for their necessary living expenses. In 2017, Hoyes, Michalos & Associates Inc. issued a report explaining that most people with low incomes take out loans to cover living expenses.
Abusive Usage of Credit Cards
Considering how credit cards are easier to use than cash, most people end up misusing them, posing a huge risk to the Canadian economy. While credit cards make payments convenient, they can land users into financial trouble.
Most Canadians use credit cards to transact. In March 2019, the Bank of Canada issued a report stating that 89% of Canadians have at least one credit card. As most credit cards charge higher interest rates of up to 22% or more, it might be challenging to pay off the entire debt once you begin using the card.
Another reason why most Canadians struggle with multiple debts is because of lower incomes, especially if the expenses outpace income. As a result, they end up spending more than what they can afford. By doing so, the consumer debts my most likely increase.
High Income Tax
When it comes to public services, most Canadians spend more than half of their income on taxes imposed on the services. Average Canadians with middle incomes spend about 63% of their income on public services, leaving them with a little amount of money to save or spend on their daily expenses.
According to Larry Brown, the president of the National Union of Public and General Employees (NUPGE), most Canadians struggle with debts because of income inequality. The latest report from the Canadian Broadcasting Corporation (CBC) states that about half of Canadian households are $200 or less far from insolvency.
How to Avoid Debt Traps
Multiple debts are unhealthy because they reduce savings, and can lower your credit score if not paid on time, tarnishing your financial reputation. In a nutshell, let’s take a look at some of the tips that can save you from getting into debt traps.
- Spend money on what you can afford. Spending more than what you earn can land you into debt traps
- Save at least 20% of your income for unexpected expenses or emergencies
- Pay your bills on time to avoid late charges. That will not only save you from debts but also stabilize your credit score
- Spend less than your credit limit to prevent high-interest charges
Canada’s household debts have been growing over time, putting Canadians at financial risks. If you are struggling with multiple debts and you need to get out of debt traps, Loans Geeks can offer a great solution. Not to mention, the website has helped many Canadians to pay off their debts on time.