Canadians should be especially careful not to fall for credit card traps
Amid a spate of interest rate hikes and increasing cautiousness among borrowers, market players and analysts are sounding the alarm on a possible upward spike in the number of consumers using high-cost debt to cover their daily living expenses.
Credit cards are a particular area of concern, as these sources of credit are relatively easy to access.
“It certainly can be a lifesaver in certain emergencies,” Canadian Federation of Independent Business president Dan Kelly told CBC News. “You’re setting up a coffee shop and your espresso machine breaks and you need to buy a new one and you need to do that today. You don’t have the money to do it. So you can put it on a credit card.”
“But you do that too many times and you can drown in the debt, and obviously the interest that is charged can be overwhelming.”
Terry Goodtrack, president of Indigenous support group AFOA Canada, stressed the dangers of the credit card trap.
“The problem with that is that easy access gets some people into trouble in the long term,” Goodtrack explained. “If you can’t pay off your credit card in a month, you’re living beyond your means.”
Credit Counselling Canada warned that in the worst case scenarios, credit cards might account for 55% to 60% of a borrower’s debt load.
“The average person who comes into credit counselling has generally, on average, six or seven creditors. And very likely there are three or four cards in there,” Credit Counselling Canada national president Patricia White said.
Early last week, the latest Consumer Debt Index by insolvency practice MNP LTD reported that the fraction of Canadians who regret their current debt loads has reached its greatest level ever since tracking of this proportion started in June 2017.
MNP found that approximately 40% of Canadians are concerned about their existing debt loads, and 43% regretted the amount of debt that they have incurred in their lives.
A full 1/3 of Canadians are also concerned that rising interest rates could subject them to a greater risk of bankruptcy. According to 52% of respondents, rising rates will also affect their ability to pay off their existing debts.
“It’s been over a year now since the first interest rate increase and as rates continue to inch higher, more Canadians are feeling it. With little decrease in household debt and the pace of rate hikes expected to accelerate, we will likely see a more immediate and significant effect on borrowers with rate increases in the future,” MNP LTD president Grant Bazian stated.
“Rising interest rates have forced people to take a more serious look at their debts. Still, many are reluctant to get professional help. They may not know where to go or they feel helpless.”