Consumer Debt Hits A New High
A report released this morning by TransUnion shows that, despite repeated warnings, Canadians are back on the borrowing bandwagon, pushing consumer debt to a new record high.
According to the report, the average Canadian’s non-mortgage debt hit $26,221 in the second quarter of 2012, up $192 from the previous quarter. This is the highest per person debt level since the credit bureau started tracking this type of data back in 2004.
The increase in average debt spanned the country, although Saskatchewan reported a slight dip on a quarterly basis and Alberta recorded a decreased annual debt growth.
Should We Be Worried?
Bank of Canada governor Mark Carney has been warning for years now that the nation’s debt levels are getting out of hand. So how much debt is too much debt? According to TransUnion’s vice-president of analytics and decision services, Thomas Higgins, Canadians aren’t likely to ice their credit cards anytime soon. Canadians are feeling more and more comfortable with the idea of taking on additional debt, and it’s partially thanks to the central bank’s stance on low interest.
The Bank of Canada has publicly announced that they don’t foresee there will be a change in interest rates for at least 12 to 18 months. This commitment to lower interest rates has caused many Canadians to believe that they don’t need to tighten their borrowing, that they have a bit of leeway in order to take on more debt.
Understanding the Whole Story
The TransUnion Report includes non-mortgage debt, such as lines of credit, credit card, car debt and installment loans. The data is based on anonymous credit files of all credit-active Canadians. But not all news is bad news. According to the reports, Canadians are repaying their debt on time and consumer bankruptcies have fallen to historic lows.
So, is there really anything to worry about?
Yes and no. Most Canadians should be able to manage their debts provided the economy stays stable. Any potential shocks in the employment market could, however, cause interest rates to increase rapidly, which could directly impact the consumer’s ability to repay debt. The worry is that most Canadians haven’t taken the precautionary steps needed to protect themselves from unexpected increases.
Case in point: Canada Trust announced this morning that they will be raising their three-year term mortgage in order to match RBC’s increase from earlier this week. TD’s posted annual rate for a three-year mortgage is now sitting at 4.05 percent. The bank is also offering a special five-year rate for new mortgage applications that matches RBC’s 3.69 percent offer.
With that being said, eliminating consumer debt completely could create even more problems for the economy. According to Ben Rabidoux, an analyst with M Hanson Advisors, a mass shift towards debt repayment could actually slow economic growth, resulting in job losses. “It’s a strange dynamic. How do you pay off the debt when paying off the debt itself becomes an economic headwind?”
How to Tell if You’re Carrying Too Much Debt
Worried that your budget might break if interest rates continue to rise? Here are five sure signs that you’re carrying dangerous levels of debt:
- You struggle to keep up with your minimum payments on credit cards, car loans, etc.
- Your credit cards have reached their max.
- You are paying one credit cards balance with another.
- You are spending 15 percent or more of your net income paying off your debts.
- Your income is already spent before you even receive your paycheque.