New year, same debt problems

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This article was published 20/01/2024 (687 days ago), so information in it may no longer be current.

It’s no secret — many Canadians may be suffering in silence, anxious about their growing debt.

A recent report from TransUnion suggests as much, finding 43 per cent of respondents felt their household finances are worse than they had planned, an increase of two percentage points from last year.

What’s more, the survey reveals that 23 per cent of respondents indicated not being able to pay at least one bill in full. Similarly, an equal number expects to use credit card debt to pay a bill because they do not have enough money in their budget.

“The positive side is most consumers can still pay their bills, but more than ever are less certain about it and making trade-offs,” says Matt Fabian, director of financial services research and consulting at TransUnion in Burlington, Ont.

“As a result, the amount of people paying over the minimum (payment) has dropped as well as how much over the minimum they’re paying on debt.”

That Canadians in aggregate are facing debt hardship is not new.

Many studies have pointed to this growing problem for more than a decade. That includes a May report from Canada Mortgage and Housing Corp., finding Canada has the highest household debt relative to GDP (gross domestic product) among G7 nations at 119 per cent.

Much of that debt is related to mortgages — a result of house price inflation and higher interest rates, it further states.

Past TransUnion’s survey data has also shown similarly high levels of financial stress resulting from high debt levels, including at the start of the pandemic.

“At the time, it was more a systemic issue with people out of work from lockdowns, but now challenges are driven by cost of living,” Fabian says.

The ‘roaring 2020s’ at the end of the pandemic with ‘revenge spending’ at record low interest rates certainly didn’t help.

Sky-high consumer demand drove inflation amid snagged supply chains. The Bank of Canada inevitably hiked its overnight rate in response. And it’s been an unprecedented steep ascent from 0.25 per on March 1, 2022, to five per cent by this past July.

In turn, the cost of carrying mortgages and lines of credit have soared equally fast.

For anyone struggling with their debt — be their mortgage or MasterCard — the best first step is reaching out to their financial institution.

“It’s really important consumers approach their bank before their debt gets out of hand,” says Michael Nitz, Thunder Bay-based vice-president for Northwestern Ontario and Manitoba South at TD Canada Trust.

Indeed, banks and credit unions can offer a variety of solutions, including budgeting tips and debt repayment strategies. Those include repayment strategies like the avalanche method, involving making extra payments — over making minimum payments on all debts — on the highest interest debt first. Then, when that debt is paid in full, additional debt payments go toward the next highest cost debt. Over time, the ability to pay down debt accelerates as less of the payments are going toward interest costs, he explains.

Other debt strategies may include consolidating high-interest loans into one loan with one monthly payment at a lower interest rate.

That’s often ideal for high-interest credit card debt, Nitz says.

Those with equity in their home may also be able to refinance the mortgage and extend the amortization for lower their monthly payments. Of course, some consumers might not have any of these options available because they are simply unable to cope and may be already delinquent on payments, leading to calls from creditors and collection agencies.

“Our basic advice is that if you have defaulted on a loan, it is better to speak with the collector than to ignore the call, which just builds the stress more and more,” says Beatrice Dyce, director of the Manitoba Consumer Protection Office.

The provincial government agency regulates the debt collection in Manitoba while also helping consumers understand their rights, and what collectors can and cannot do.

“So, for example, collection agents can’t phone or visit before 7 a.m. or after 9 p.m. — Monday through Saturday, or any time on Sunday and statutory holidays,” she says. “They also can’t threaten you with action they don’t have the authority to do, so they can’t say, ‘If you don’t pay this, we will report you to the police.’”

One thing the Manitoba Consumer Protection Office cannot do, however, is provide advice to consumers on how to manage their debt situation.

Outside of their financial institution, the best options for advice are debt counselling agencies — non-profits like Credit Counselling Society or Community Financial Counselling Services, whose services are free of charge.

Another choice is federally regulated insolvency trustees. These are the only debt advisers who can offer insolvency options, says Leigh Taylor, licensed insolvency trustee at LCTaylor Licensed Insolvency Trustee in Winnipeg.

“Half of the people we talk to never go bankrupt or file a consumer proposal.”

He adds that trustees can also offer budgeting advice and, like other debt counsellors, repayment plans that do not involve insolvency proceedings like bankruptcy or a consumer proposal.

“The bottom line is you want to get the right information so you can make a decision that is in your best interest and not in your creditors’ best interest,” Taylor says.

Regardless of debt relief strategy, the sooner indebted consumers take action, the better because delays often make situations worse, limiting their choice of action, Nitz says.

“The earlier you seek medical advice, the better off you’re going to be, and it’s no different when dealing with debt problems.”