Debt is a problem faced by many Canadians, but what does it mean to be in debt, really? It may seem like an odd question to ask. After all, if you’re deep in debt, it should be obvious, right? Not necessarily. For many, carrying debt is just a fact of life, so much so they’ve become desensitized to it and don’t even realize they might be in trouble. So let’s cover the warning signs that you’re in too much debt!Many people struggle with credit card payments, student loans, inherited debt, and other balances owed. And, they don’t really think they’re that deep in debt. In fact, Canadian consumers are now carrying close to $2.1 trillion in debt (mainly due to mortgages) which is almost a 5 percent increase from last year. So for many Canadians, being in debt is considered to be “normal” even if it means struggling to make ends meet every month.
What Does It Mean to Be in Debt in Canada?
What does debt mean? At its most basic definition, debt is money (or something else of value) that is owed to another person or legal entity, like a company. So, you could say that being in debt means you owe something of value to someone else.
However, the reality of being in debt goes beyond that simple definition. For many, being in debt is a constant factor influencing their life choices — something that makes it harder to live a free lifestyle where they can pursue their dreams and passions. (We see it all the time at Credit Canada.)
For some, being in debt means:
- Constantly having to fear phone calls from collection agencies;
- Worrying about whether they’ll ever get approved for a mortgage;
- Not being able to sleep, worrying about bill payments and other financial obligations;
- Not having easy access to affordable financial services.
Thankfully, there are ways to get out of debt, end collection calls, and improve your financial health!
You’re Not Alone: Many Canadians Are in Debt!
So, how many people are in debt in Canada? According to the 2019 Canadian Financial Capability Survey (CFCS), nearly three-quarters of Canadians reported having some form of debt or used a payday loan. Of those, about a third reported they had too much debt.
Of course, not all debt is bad. Many people included in the survey either had minimal balances owed or were carrying a mortgage. (A mortgage is sometimes considered “good” debt because a home increases in value over time.) However, the nearly one-third of Canadians who said they owed too much shows that, if you’re in debt, you’re definitely not alone.
But, how do you know if you owe too much money to creditors?
How to Know You’re In Too Much Debt
Most Canadians carry some form of debt, whether it’s a credit card, a line of credit, or a mortgage. But it might not always be clear as to how much debt is too much debt. Luckily, there are warning signs. Some of the warning signs of problem debt include:
Not Being Able to Afford the Monthly Minimum Payments and Basic Necessities
One of the most obvious signs that you’re carrying too much debt is if you find yourself unable to pay both your monthly minimums and the costs for basic necessities (like food and shelter). For some, this may be the final warning sign they need to start looking for ways to eliminate debt.
In extreme cases, the bills can start piling up faster than they can be paid. This can be incredibly stressful for anyone. So, it’s important to seek help if you start falling behind. Remember: there’s no shame in asking for assistance when you need it!
Dreading Phone Calls from Collection Agencies
When your phone rings, who’s usually on the other end: A friend, a coworker, or a collection agent representing a creditor? When you’re in debt, it’s often the latter. Collection calls are an unfortunate fact of life for many people in debt.
Thankfully, there are limits on what collection agencies can do in Canada. For example, they can’t use threatening language, call you outside of certain preapproved times (which vary by province), or discuss your debt with anyone else (unless they are a cosigner on a loan or you gave permission).
Despite these limitations, dealing with collection agencies can be an enormous stress factor when you’re in debt.
Frequent Overdraft and Overlimit Fees
When you spend more money than you have in your bank account, your account is considered “overdrawn” because your balance is now less than zero (or negative). Your bank will charge you an overdraft fee because you are now “borrowing” money from the bank.
Similarly, if you borrow more than the credit limit on your credit card, your credit card company will charge you an “overlimit” fee because you have extended yourself past your borrowing limit. Overdraft charges and overlimit fees vary from one institution to another.
Frequent overlimit fees on credit cards are a major warning sign that you are carrying too much debt. Exceeding the limits on credit cards not only means paying costly fees — it can also hurt your credit score because you are maxing out your utilization rate.
Ideally, you should use no more than 30 percent of your credit limit at any given time. Using more than 30 percent will typically start to impact your credit score.
When money is tight, it’s hard to keep the cabinets full of good, healthy food. One of the things some people cut is their food budget. While eliminating excess trips to the local restaurant or your favourite takeout is a great way to cut back on costs, it can become a problem if you cut your food budget too much for things like groceries.
For example, you might start buying food that is cheap and easy to make rather than healthy and filling. If you’re having problems making room for healthy food in your monthly budget, it might be time to seek some help!
Hiding Expenses from Loved Ones
Sometimes, people in debt might feel guilty about making purchases — even necessary ones — and try to hide the costs from their partner, parents, children, or friends. If you ever feel the need to hide your spending from the people you love, that could be a sign that you have a problem with debt.
What You Can Do about Debt
When you’re in debt, it usually means restricted financial freedom, so getting out of it quickly can be a major goal for some. But, how can you get out of debt?
Here are a few things you can do to get out of debt and back to life:
1. Set a Monthly Budget
As the old saying goes, “An ounce of prevention is worth a pound of cure.” One of the keys to managing debt is to prevent it as much as possible. This is where having a monthly budget can help.
Keeping track of your monthly income and comparing it against what your monthly expenses are can give you a good idea of how healthy your finances are. If you find that you’re spending more than you’re earning, you can look for non-essential expenses in your budget to cut so you can start having a monthly surplus.
2. Use a Repayment Strategy
Instead of just making your minimum monthly payments, focus on paying down your debts to zero, one debt at a time. The way this would work is you continue to make your minimum payments on all of your debts, but any extra money you have, you put it all towards a single balance until it is paid in full. Then, repeat this process until each debt is paid off.
This can help you eliminate some debts faster and build a sense of progress towards your goal of being debt-free one balance at a time.
When choosing which debt to pay off first, it can help to either focus on the debts with the smallest outstanding balances or the ones with the highest interest rates. For example, paying off the smaller balances helps you stay motivated since you’ll see debts disappear faster. This is called the “snowball” method of repayment.
Meanwhile, focusing on the balances with the highest interest rates helps you minimize the money you spend on interest in the long run. This is also known as the “avalanche” method.
3. Consider a Debt Consolidation Loan
If you have too many sources of debt to keep track of, but still have relatively good credit, you may want to consider a debt consolidation loan. By borrowing from a bank to pay off all of your debts, you can go from dealing with many creditors to just one. Additionally, you might be able to get an overall better interest rate on your debt with a debt consolidation loan than what you have with your current creditors.
However, it’s important to remember that you need to qualify for these types of loans. Lenders may refuse to offer you a debt consolidation loan if you don’t meet their criteria, such as having a good credit score.
4. Consider a Debt Consolidation Program (DCP)
What can you do if the bank won’t give you a debt consolidation loan and debts are piling up faster than you can pay them? You might want to consider debt consolidation services, like a Debt Consolidation Program (DCP). A DCP can be a great fit for anyone who needs to get rid of debt but who also want to avoid extreme measures, like insolvency (i.e., bankruptcy or a consumer proposal).
Under a DCP, you can combine your unsecured debts into one monthly payment. A Credit Counsellor will negotiate with your creditors to help stop or reduce interest charges, put an end to the collection calls, and make sure you still have room in your budget for basic necessities.
A typical DCP can last between 24-48 months (2-4 years), after which time, you will be debt-free! With the help of the right service provider, like a non-profit credit counseling agency, you can take control of your finances to get (and stay) debt-free!