Between inflation, housing costs and interest rates, debt is ballooning for many younger Canadians.
Scott Terrio sees it all the time. The manager of consumer insolvency says the average credit card balance in sa国际传媒 is less than $4,500, but the cases he saw last year averaged more than $12,000 for this young group.
Terrio helps clients cut deals with creditors and avoid bankruptcies, if possible, at Hoyes, Michalos Licensed Insolvency Trustees. Looking at his 2023 filings for clients aged 18 to 29 across Ontario, he said average credit card debt was up 34.5 per cent from 2022.
Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of sa国际传媒 Inc., notices the same trend. The national non-profit organization usually works with Canadians on education and debt restructuring but also sometimes refers clients to insolvency firms if their situation is dire.
鈥淲e looked at Q1 for 2023 versus Q1 for 2024,鈥� Schwartz said of the firm's clientele. 鈥淎nd specifically for those people that were under 40, in our client base, we鈥檙e seeing that the debt loads for those people has increased about 27 per cent. Like all of a sudden, when people aren鈥檛 making that much more, if anything more at all 鈥� not to mention the interest rates that have gone up over the last little while, then it becomes more and more of a challenge.鈥�
This represents a large demographic for Consolidated Credit, he added. Over half of its clients are under the age of 40.
Terrio said his clients show up with the 鈥渢ypical Canadian financial life鈥� 鈥� starting with a credit card at 18 and a student loan, then card companies keep increasing the limit and consumers run up their debt. Seeing the interest load, these people then get a line of credit with lower interest rates and transfer the balance there.
Now, Terrio said, they feel relieved 鈥� and they keep spending.
Once they flip their debt to a line of credit, he said consumers should cut up their credit card and live on cash flow as much as possible. But their debit card sits unused, while they keep tapping credit everywhere instead.
鈥淭hey run their Visa back up because they didn鈥檛 cut up their card,鈥� Terrio said. 鈥淪o now the banks got you three times, and they got you for life.鈥�
Terrio said it's the same story over and over again, and is critical of ever-increasing limits offered to young people when financial literacy is typically at its lowest.
鈥淚鈥檓 always the first person these people have spoken to who鈥檚 helped them in their financial adult life,鈥� he said.
It鈥檚 impossible to ignore current market conditions, however.
As Schwartz pointed out, Canadians are feeling the squeeze between incomes that haven鈥檛 kept up with the cost of living, housing crises in markets across the country, and rising interest rates brought in to control inflation.
Managing spending and debt becomes a tightrope act, especially for younger people, Schwartz said.
鈥淪o with the advent of social media, and the ease with which someone can buy something online, we鈥檙e finding that consumers have adopted these behaviours whereby they鈥檙e trying to keep up with their friends and family,鈥� he said.
He also warned against so-called lifestyle creep, when people start making a bit more money, and just start spending more.
鈥淭hey may see a slight increase in their income, and they think, 'Oh, I just kind of hit the lottery, and now I'm going to spend like crazy,鈥欌�� Schwartz said. 鈥淎nd it鈥檚 tough to change those behaviours after it鈥檚 been ingrained for a long period of time.鈥�
To prevent this from happening, track spending diligently 鈥� you can download apps for this purpose 鈥� and delay milestones such as moving out or getting a car if you can, Schwartz said. Build up an emergency fund in case you lose your income or suffer a financial setback, to avoid falling into serious debt.
鈥淚f you have the opportunity when you鈥檙e young, when you鈥檙e not spending as much on rent, you鈥檙e not spending as much on food, if you can cut back on how much you鈥檙e socializing 鈥� that鈥檚 a great place to start to build up that reserve fund,鈥� Schwartz said.
Live within your monthly cash flow 鈥� using your debit card or cash 鈥� and develop a short-term austerity plan to make big strides on debt repayment, Terrio said.
Summer months are tough for austerity because you want to socialize, he pointed out, but January through March are a good time to adhere to a severe budget. Up to 40 per cent of your non-rent income should go to debt, Terrio said, noting short-term austerity is tolerable because it鈥檚 over quickly.
Ultimately, the aim is to reach the tipping point when at least half of your debt payment is going to the principal 鈥� and the portion going to interest starts to slide. Never use an instalment loan, he added.
鈥淎ll these 36 to 48 per cent interest loans that are $10,000 鈥� if you get one of those, you鈥檙e done,鈥� Terrio said. 鈥淵ou鈥檙e never, ever getting out.鈥�
Once you鈥檙e free of debt, stay that way. Keep your credit limit low and turn down offers to increase it, Terrio said. If you move debt to a line of credit, stop using your credit card.
鈥淵ou decide how much debt you鈥檙e going to have, not the bank, right?鈥� Terrio said.
鈥淚 know it鈥檚 tempting. If they give you a credit card for $20,000, don鈥檛 take it, just take $5,000. Because if you get into $5,000 debt, we can fix that. You can fix it. If you get into $20,000, I have to fix it, right? You鈥檙e in my office.鈥�
This report by The Canadian Press was first published May 28, 2024.
Nina Dragicevic, The Canadian Press
