Feeling caught in a debt spiral? Many Canadians have household debt, and with interest rates on the rise, many people are going to have a harder time paying it off.
“Debt is at an all-time high,” says John Eisner, president, Credit Counselling Services of Atlantic Canada. “Every time there’s a new report, it’s going up.” According to Statistics Canada numbers released in September 2017, Canadians owe $1.68 for every dollar of their disposable income.
Here are six reasons you may feel like you’re in a never-ending debt loop.
1. Your debt is stretched out.
Eisner says the reason you can’t get out of debt is simple: “Financial institutions have made it easier for you to stay in debt.”
For example, he says minimum payments on credit cards used to be 5 per cent of the balance. Now, they’re as low as 1 per cent.
“They’ve made it easier for you to make the payments, but you’ve just stretched the debt out forever,” he says.
Your credit card statement illustrates this problem. There’s a box on your statement disclosing how long it will take you to pay off the balance if you make only the minimum payment. You might be astonished by the number of months – or years – it will take.
Lines of credit are even worse, says Eisner, because now, you’re often only required to pay the interest.
Payments on lines of credit used to be 3 per cent of the balance, so on a $40,000 line of credit, the payment used to be $1,200 a month.
The interest on the same loan might only be $200 or $300, he says, making for a substantial payment difference if that’s all you’re paying.
2. You don’t have a plan.
“There’s a large part of the population that struggles with debt that far exceeds the population that struggles with low income,” says Wendy Dupuis, executive director of Financial Fitness, a non-profit credit counselling service.
“So, we know that there are people who probably have an adequate income who just aren’t managing their money well,” she says.
“Budgeting is vital,” says Eisner. You must make sure more money is coming in than going out, and if it’s not, you need to make adjustments.
“As long as you’re running a deficit, the situation is going to get worse, your debt load is going to last longer – not only longer, but it’s also going to increase because of the interest,” Eisner says.
If the word “budget” has you thinking of all the costs you have to cut, you may be surprised to learn that “budgeting isn’t about having less,” Eisner says. “Budgeting is about doing more with what you have.”
You also may need a specific debt plan. Give yourself a goal – maybe it’s to be debt-free in the next 12 months, or maybe it’s to cut your debt load in half by next summer. It doesn’t matter what your plan is, just that you have one and stick to it.
“If you’re going to build a home, you have a plan, because if you don’t, that house is not going to look very straight,” says Eisner. “Money’s no different. You need a plan.”
3. You think your financial situation is fine.
“So many people are living paycheque to paycheque,” says Eisner.
“They are able to manage the payments if everything stays the same,” says Dupuis. “Credit’s usually available and acceptable, so they use credit to supplement their lifestyle.”
That’s all well and good until something unexpected or new happens.
“All it takes in most people’s lives is an illness, job loss, reduced income, gambling, drugs, alcohol, a new house, a new baby,” says Eisner. Suddenly, you’re in trouble because you’ve been relying on your expenses and income staying exactly as they are.
“If you’re carrying debt, you can be in trouble pretty quickly” if your finances get shaken up, says Dupuis.
Since most people rely on credit to take care of emergencies, they save less, she says. Then, if something does happen, people fall into debt simply because they weren’t prepared.
“People have it backward,” says Dupuis. “They usually spend first and save what’s left, and there isn’t anything to save.” She recommends having an emergency fund of $500 to $1,000.
“That’s what most emergencies cost,” she says. “Having that set aside saves us from going into debt when we can least afford to do so, during an emergency.”
4. You don’t talk about money.
People don’t like to talk about money. Whether they’re embarrassed or just feel that talking about money is distasteful, avoiding conversations about finances is not healthy.
Even couples often don’t talk about money, says Eisner. They may divide up the payments – one pays the mortgage, the other the car payments – but they’re not in sync, he says.
Talk about money with your partner, and make a plan together.
“In order to accomplish the big picture, everyone needs to be on the same page,” says Eisner. If neither of you understands budgeting or money management or if you’re running a deficit, seek out the help of an accredited credit counsellor.
“There’s no shame in not knowing,” says Dupuis. “People should be proud that they’re taking the action.”
5. You’re trying to keep up with the Joneses.
The Joneses aren’t even our physical neighbours anymore, says Dupuis. They may be people we see on TV or on social media.
“Sometimes we get distracted by marketing, or we get distracted by things other people have, and we’re not really being true to ourselves and our values,” Dupuis says. “What is more important, and do we need to have all that stuff? Do we need to spend all this money?”
And if you become accustomed to a certain level of spending, it can be hard to admit that you either can’t afford it anymore – or that you never really could. Many people rack up credit card debt that they can’t afford, then struggle to pay the minimum just so they can keep charging the next month.
“It’s hard sometimes to convince people to change lifestyles,” says Dupuis. “I think what they don’t realize is that they’re financing a lifestyle that they really can’t afford.”
Sit down and figure out what is important to you and your family, and set realistic long- and short-term goals. This will help you avoid getting distracted by all the things you could spend money on, and focused on what will be more meaningful for you.
6. You’re chasing points.
We all love a bargain, and it’s hard to beat getting something for nothing. But, Dupuis says, “Sometimes a sale isn’t a sale.” When you buy something you don’t need or can’t afford, you’re not getting a deal.
The same is true with points or other credit card incentive programs, including cash back cards. If you are putting all of your purchases on your credit card to maximize the points or rewards you get, you might be sabotaging your efforts to get out of debt if you aren’t able to pay off the balance in full each month.
“How much are you paying in interest if you’re carrying a balance every month? How much are those points costing you?” Dupuis asks.
She adds that it’s also important to comparison shop – one store may offer points for a purchase, but you might get a better deal elsewhere.
“I’m not opposed to people having credit cards. I’m not opposed to points or incentive programs,” Dupuis says. “What I am opposed to is just using those systems, those incentives, and not having it be part of your plan.
“You really have to be a little bit savvy, a little bit aware, and a little bit discriminating about what you need and where you can get it for the best price,” says Dupuis.
“Use of a credit card or use of an incentive plan always should be within the parameters of your budget and within the parameters of what you already spend or plan to spend.”
Only you can end the debt cycle
Only you can make the choices and actions to change your financial situation. You can go to a financial professional, but they can’t force you to make adjustments or cut certain spending.
“What we do is review everything and say, ‘These are some areas where you may be able to make adjustments,'” says Eisner. “But only you can make those changes.”
And you may need to find your inspiration to make those changes, whether it be a sudden realization of where you are, or a life-changing event, such as a pregnancy.
“Sometimes, your situation has to be really uncomfortable before you move out of it,” Dupuis says. Until then, we may make excuses for not changing our lifestyle or spending habits.
When you do, though, you may find your financial situation is not the only thing that benefits.
“There’s a mental peace, stability and less stress that comes with not owing money,” Dupuis says. “That’s a pretty good place to be in.”
