Top 5 reasons why Canadians are in debt

Why is Canadian household debt so high?

Unfortunately, for most people across the globe, debt is a reality of life. Whether you’re taking out a loan to further your education or kick-start your own business or getting a mortgage… There are a multitude of reasons why people may find themselves in debt. 

The Covid-19 pandemic has seen Canadian debt rise. As debt levels have continued to fluctuate since the beginning of 2020, Canadians have seen their debt to income ratio rise to 175 percent, which means that for every dollar of disposable income a household has, they owe $1.75. This high household debt is mainly due to rising house prices and low interest rates. 

5 reasons why Canadians are indebted 

1. Credit Card Debt

Most Canadians have a credit card due to its convenience. However, this ease can equally cause people financial issues. Since credit cards are so easy to use when you don’t have access to cash, people regularly use them without thinking about the financial consequences it may have further down the line. Purchases can quickly begin to stack up and before you know it, you are in a substantial amount of credit card debt. 

Credit card debt is a particularly dangerous form of debt due to the high interest rates that are attached to it. Although it may seem harmless to use your credit card every once in a while, if you are not good at regularly paying it off, it can quickly become an overwhelming source of debt. 

2. Mortgage Debt 

Mortgage debts are another extremely common form of debt. If you want to get on the property ladder and buy your own home, you will most likely need to take out a mortgage. 

When you take out a mortgage, you borrow money from the bank to cover the cost of the house that you cannot afford to pay outright. You then create a payment schedule with your bank of choice in which you set a monthly payment amount and duration over which you have to pay the debt off. As you can imagine, if your mortgage has a longer duration, your monthly payments will be lower, whereas with a shorter duration they will be high. 

When you set out the terms and conditions of your mortgage, you usually make sure that you’ll be able to respect your payment obligations in the future. However, people often encounter unforeseen circumstances that affect their ability to make their monthly payments. 

3. Student Debt 

Another often unavoidable debt is student debt. Most individuals and families cannot afford to fund further education out of pocket, meaning most university students require some form of financial aid in order to complete their studies. When students finally finish their studies and start working, they usually already have a large amount of debt. 

4. Lack of knowledge 

Financial education is not something that is frequently taught in schools so many enter the real world without a good understanding of personal finance and key life skills such as budgeting. 

Fiscal responsibility is not necessarily an inherent skill that all people possess so individuals that are not taught about money and how to responsibly use it are more likely to find themselves in debt. 

For example, a basic grasp and understanding of your credit score is integral in order to remain financially stable. However, if you aren’t taught about how your spending habits can affect your credit score, your credit score is likely going to suffer which could hinder your ability to borrow money. 

5. Lack of savings 

Building up your savings is easier said than done. A lack of savings to fall back on in times of financial hardships is one of the main reasons people find themselves in debt. Financial responsibilities that you didn’t foresee, such as medical bills or car repairs can be a big blow if you do not have savings. 

If you have savings, you can dig into these to help you deal with unforeseen expenses. However, if you do not have said savings, you will have no choice but to take out a loan and pay interest rates. 

Expert tips to avoid debt 

1. Budget 

Budgeting is the number one way to avoid getting into debt. If you know exactly how much money you have coming in, and how much money is going out on things such as rent, and bills, you can calculate how much money you have left for food, activities and how much you can put away in savings. Having an ongoing budget that you record and amend will ensure you are continuously keeping track of your spending. 

2. Learn

As previously highlighted, a lack of knowledge regarding finances is one of the main reasons why people find themselves in debt. However, if you are proactive and take matters into your own hands, you can educate yourself to avoid falling into this trap. 

Simply looking online and teaching yourself or attending a basic finance class can help you better understand how money works, the contingencies you should have in place and how to be more financially responsible. 

3. Talk to someone

If you’re having financial troubles, often the last thing you want to do is talk to someone about it. However, it is actually the best thing you can do. Granted, you might not want to talk to close friends or family out of fear of embarrassment, but there are other people you can talk to. 

Talking to a licensed insolvency trustee is the best thing you can do if your financial situation is beginning to worry you. Whether you have newly emerging financial issues or are considering bankruptcy, an insolvency trustee is there to analyze your financial situation, provide professional advice and explore different solutions with you. 

Schedule a free consultation