Opinion

PETER DOLEZAL: The consumer debt challenge

A recent Bank survey of Canadians’ track record of credit card payment practices found that only 48% of us pay our full account balances each month.

The other 52% incur compounding interest costs – at a typical rate of 19.99%. Department store cards often have annual interest rates as high as 30%.

The survey determined that 18% of Canadians carry an average outstanding balance greater than $5,000. Many of these cardholders make only the minimum-required monthly payments, usually set at 3% of the outstanding balance.

An example which will shock. An outstanding balance of $5,000; minimum monthly payments of 3%; interest rate of 19.99% - it would take a cardholder 21 years to pay off this debt.

The result? In addition to the original $5,000 of principal, $5,984 in interest charges would be added – for total repayments more than double the original $5,000.

Most Canadians in this unenviable position fail to realize that the fabulous $5,000 Hawaiian vacation charged to their credit card can end up costing them almost $11,000.

To equip ourselves, particularly our younger generation, to avoid such financially-disastrous decisions, schools and parents must jointly do much more to raise levels of  financial literacy.

The average Canadian household now owes about $1.65 for every dollar of after-tax income. Most of this is in the form of mortgages, which are secured by the value of the real estate.

However, about $30,000 of this indebtedness is in non-mortgage debt – mainly vehicle loans and credit cards.  It is credit card debt that triggers the majority of personal bankruptcy filings.

In 2013, about 128,000 Canadians became personally insolvent. Of this total, about 48,000 made successful debt-restructuring proposals, while the other 72,000 declared personal bankruptcy. Particularly concerning, is that 8% of all bankruptcies involved Canadians aged 65 and older – a dramatic increase from 6% just five years ago.

Even more concerning is that in 2013, seniors’ indebtedness grew by 6.5%, the highest increase of any age group.

Canadians are entering retirement with more per-capita debt than ever before.

Part of this is undoubtedly fuelled, not only for seniors, but for all age brackets, by the incredibly-low rates on mortgages and even car loans.

Individually, the monthly payments seem manageable – until the cumulative effect leads to financial stress, followed by an eventual crisis which can result in a bankruptcy.

It is worth repeating the mantra of previous articles.

Some debt, particularly mortgages and education loans, are a necessary evil – difficult to avoid from early adulthood to our middle age when families are growing.

However, by our fifties, early liquidation of debt should be a major priority. In retirement, debt should be recognized as the greatest impediment to a comfortable and stress-free retirement.

At all ages, minimizing and liquidating debt takes planning and discipline. It is not easy.

If however, we cannot come to grips with the challenge, current life-wrenching insolvency and bankruptcy statistics will only become worse – especially as interest rates increase.

 

A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (www.dolezalconsultants.ca), Peter Dolezal is the author of three books, including his most recent, The SMART CANADIAN WEALTH-BUILDER.

 

 

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