Are Canadians too blasé about debt?

Here’s how to take control of your debt before it takes control of you.



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Have Canadians adopted a cavalier attitude to debt? If you look through the recent TransUnion releases you might think that’s the case.

Each quarter the credit reporting company puts out a press release about our nation’s personal debt levels. The headlines tell the story. “Personal debt levels shifting back to growth mode,” screams the headline from TransUnion’s recent release. And, should you dare to read on you’ll discover that average consumer debt, excluding mortgages, is $26,221. While that’s an astonishing figure, it’s not the worst part. The fact that the figure keeps increasing seems to suggest that Canadians don’t give a damn about debt.

On September 25, bankruptcy trustees Hoyes, Michalos & Associates released a poll that reinforces this attitude. The survey found that nine out of 10 respondents would consider borrowing money to cover an unexpected cost. The survey, which was conducted by Harris/Decima and involved 1,010 Canadians, also found that 26% of respondents have a higher debt level than they did a year ago, while 70% of those surveyed said they need “immediate” help with their finances.

“It’s frightening to see that Canadians have become totally blasé about debt,” said Douglas Hoyes, the trustee company’s co-founder, in a release. “It’s becoming their new ‘normal’ and they’re numb to this dangerous trend.”

He’s right that these numbers are scary. When—not if—interest rates rise, this debt will become more expensive. According to TransUnion’s most recent report, Canadians who have tapped their line of credit are carrying an average balance of $33,271. Interest on that debt will jump when rates increase.

Of course, none of this should be news to anyone. Bank of Canada governor Mark Carney has repeatedly told us that our debt levels are too high and countless articles have been written espousing advice on how to clean up our personal balance sheets.

Yet, debt levels keep rising.

It’s no longer good enough to simply hold out that growing household debt figure and hope it shocks people into lowering their debt. If a massive financial crisis couldn’t get people to be more prudent about their finances it’s hard to know what will.

The question we should really be asking ourselves now is this: why don’t people care about debt?

I asked Claire Tsai, a professor at the Rotman School of Business, for her thoughts. She’s studied behaviours around debt and spending and found that we simply don’t have enough will power to save. All it takes is a 10-minute walk through the mall on a Saturday to see that she’s right. “Spending comes with immediate pleasure that is difficult to resist,” she says. “People aren’t very good at self control.”

You’d think that seeing your bank account balance rise and your debt levels fall would also be gratifying. Not so, say Tsai. It often takes too long to see a meaningful bank balance and, even if you do save, it’s hard to get excited about cash you can’t touch. “The long-term benefits (of saving) are very ambiguous,” she says. “People don’t know how much they need to save for retirement or even how much they need to pay off their debt.”

Another problem, Tsai says, is that people don’t pay enough attention to the consequences of their actions—especially actions that are repeated every day. You might call this the Starbucks effect. Spending $5 on a coffee may not seem like much on a day-to-day basis, but over time and you’d be astonished to see how much you’ve spent for your morning caffeine jolt. (If you’re wondering it’s $1,825 a year.) “People don’t look at spending as one thing,” she says. “They don’t integrate their consumption.”

Then there are the tricks we play with ourselves. Who hasn’t rewarded themselves with a little, but perhaps not-so-cheap, toy or treat after a stressful day of work? “I worked hard today so I deserve a reward,” she says. “It’s justifiable.”

Add all of this together and it’s no wonder we have a debt problem.

Fortunately, there are some ways to get a handle on this before it’s too late. The best thing to do is create a financial plan. Having clear goals and a plan to achieve them does wonders for strengthening will power, Tsai says. It’s easy to see what you need to do to save and people often feel bad when they fail to stick to it.

Also keep things simple. Studies have shown that if someone’s faced with too many investment choices they won’t save at all. Tsai suggests creating three categories for yourself: equity, fixed income and cash. Pick basic investments and then save evenly between all three. Set up an automatic plan that moves money from a chequing account into those investments. The less you have to do the better.

Find an online debt repayment calculator and actually see how long it will take to pay off your debt. Tsai’s found that people start understanding the impact of their spending when they can see, visually in a chart or graph, the damage they’re doing and what they need to do to fix it. “They can see the impact of what setting aside $50 a month would do to their debt,” she says.

When it comes down to it, though, people need to summon the will power to save. However, it may have to take an interest rate increase or a few more frightening debt level reports before Canadians take action. “It’s very hard to change people’s behaviours, especially with something that people find complicated,” Tsai says. “People will experience (the pain) at some point, but right now debt is just a number.”

4 comments on “Are Canadians too blasé about debt?

  1. It's quite scary when you think that $27K debt load is not far from the Canadian average income of $46K (2012). Considering that average incomes are in this range, it's really a matter of Canadians living beyond their means. Trying to live a lifestyle that is, frankly, unrealistic. I believe Gail Vaz Oxlade said in a recent piece that she sees lifestyle expenses (going out, restaurants, etc.) are the biggest contributor to money issues (and presumably, debt.)

    Our family has been fortunate in that my wife and I both have well paying careers which allowed us to have the income to "get over the hump" so to speak. However, we have had to resist the urge to buy a bigger house, new cars, and expensive vacations. I find my friends and colleagues expand their lifestyle expenses to consume any increases in compensation. Or worse, try to keep up with each other even though their incomes don't really allow for it.


  2. Canadians seem to think that debt is the normal way of life. People are getting into big messes because when they cannot pay it off, they are in big trouble. I have found that once I cut back on my spending on clothes, restaurants, and bars, I can very easily stay within a budget and pay off my debt at a rate so much faster than my recently graduated peers. As my income increases, my lifestyle costs will not increase at the same rate, so that I can put actual money, NOT credit, towards the things I want.


  3. People have to understand that there are two forms of debt; good debt and bad debt. Good debt would include things such as a mortgage which enables people to become homeowners and build equity in the long run. Student loans would be considered good debt as they enable people to acquire a higher education so that they can be considered for higher paying positions.

    Bad debt is consumer debt usually in the form of credit cards and lines of credit. This kind of debt is usually spent on "stuff" that most people don't really need in the first place. People that have large amounts of consumer debt envision a lifestyle greater than what their incomes can provide. They finance the a lifestyle that they can't afford to sustain with credit cards and lines of credit. In the end they just end up with more "stuff" and worse off then when they began. Differentiate between your wants and your needs and learning to save for items before purchasing them will put you on the path to financial security.


  4. Technically, a mortgage on your home is not a good debt unless someone else is helping to pay it off. For example, you live in a duplex where the rent received from the tenant in the 2nd unit helps to pay or pays off your mortgage. A debt is only good if it helps to buy assets which put money in your pocket. A debt is bad if it takes money out of your pocket, in other words, it is a liability. Owning a house typically takes money out of your pocket. First off, it is only you paying the mortgage. Then there are the heating costs, the electricity costs, the maintenance costs, property taxes, all which take money out of your pocket. Your mortgage is actually considered a liability to you although it is considered an asset to the bank. Why? Because they collect interest which puts money in their pocket. One last point, unfortunately, you can't rely solely on equity. Ask millions of people in the U.S. about that. Billions of dollars of equity was lost when the housing bubble burst a couple of years ago.

    Yes, consumer debt is the real culprit here. To people's defense, that's the way our economy functions. In order for the economy to grow, people must get into debt, that is, they must purchase goods and services they cannot afford without obtaining credit. If the average salary is only $46K, how could anyone afford to purchase a vehicle or buy furniture a today's prices? The answer: by paying monthly. It certainly is a trap. How do you get out of the trap? Figure out a way to buy assets that put money in your pocket first so that when you do purchase that new vehicle or piece of furniture or 80 inch wide screen, 3D TV, it is already paid for by the money your putting in your pocket from that asset.


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