Debt – Why Coming In First is Not a Good Thing

Canadians came in first this week, it wasn’t hockey, we are still working on that.  Unfortunately the  Canadian General Accountants Association has released a study measuring Debt to Income ratios and we have the dubious honour of being the country with the highest ratio of the G20 countries measured. 

What does this mean and why should we be worried?
The debt to income ratio measures the amount of debt carried versus personal income.  Given the recession, it would generally be expected that people would slow down their borrowing and focus on saving and paying down debt.  Certainly that is the best way to financial health in the short term.  But that is not what we Canadians did.  Instead consumers kept buying on credit, increasing their debt load relative to income.  Consumers have kept afloat only because interest rates have been historically low, so the cost of servicing the debt has not risen as fast as their debt.  That is a good thing.

But Canadians should be worried.  Interest rates are forecasted to start increasing over the summer.  Once this happens the cost of serving debt will increase.  For many this may be the tipping point, and a new wave of personal bankruptcies and foreclosures could be the result.

What can you do?
Now is the time to do whatever you can to decrease your debt load, and decrease your interest rates.   If you are carrying balances on your credit cards think about consolidating your balances in a term loan.  You will get a lower interest rate and will save money now and when interest rates increase the savings can be used to pay down debt.

It is also time to take a really good look at your spending and savings habits.  Canadians on average are now saving less than 1% of their income.  This is a far cry from the 20% saved as recently as the 1980’s.  Making small changes can have big effects on your financial fitness.   To take our Financial Fitness tests click here. Need some help figuring out what all this means to you.  Come in, we want to C.U. to get you started on improving your financial fitness.