In the second quarter of 2023, credit card balances for Canadians hit a record high of $107.4 billion. The report from Equifax also highlighted the average non-mortgage debt for credit active consumers edged up to $21,131.
This type of increasing debt has an effect on the economy. The higher the consumer debt, the less money an individual has as disposable income. Consumer spending is one of the major drivers of an economy. So, it stands to reason that when they cut back on spending, the economy slows down.
There are other consequences for this type of behaviour. If the balance tilts too far toward loan and credit card numbers get big, the financial stability of an economy can be risked.
What factors contribute to the growing loan and credit card balances?
It’s important to understand how these balances got so big. Some psychologists point to what’s called detachment. They say that people feel less stress when they buy something on a loan or with a card. For them, it doesn’t feel like they’re really spending their own money.
Of course, there are other factors.
- Renting a place in Canada is getting more expensive. According to a recent CBC news report, the average rent across the country has reached a high of $2,117 per month. That can force people into using their credit cards for even the staples like groceries.
- Inflation has been driving up prices in Canada. In fact, the latest reports on the inflation rate (Sept 19) have it rising to 4.0%. That means Canadians will be paying 6.9% more for their food and 6.5% more for rent. Once again, not having the money up front to meet these requirements can mean using credit.
Using credit to cover costs as prices rise isn’t an ideal solution. However, it’s becoming a necessity for part of the population, and the trend has consequences.
How does a growing loan and credit card balance affect an individual’s financial situation?
Taking out more credit in the form of credit cards and loans has an effect on your financial situation.
- Overspending on your credit cards means you need to carry a balance with accruing interest. Once that balance starts to grow, it gets harder to pay off the card completely. As the interest compounds, you’ll need to budget for it. That gives you less money to spend on other needs and wants.
- An individual’s financial situation can be affected by growing loan and credit card balances in other ways. Making minimum payments on high interest loans usually means you’ll be paying more than the original item cost.
- Individuals with high levels of debt rely on their employment to service the debt. That makes them more vulnerable to economic downturns.
Understanding the consequences of high levels of debt is a good beginning. People who have found themselves in this situation can look to certain tools and remedies that work.
Are there any strategies or techniques to manage and reduce growing loan and credit card balances?
Having a plan is the best way to tackle debt. Individuals can accomplish that goal by practicing these tips.
Make A List
It’s important to identify how much you owe. For each debt on this list, you’ll need to write down the total amounts as well as the minimum monthly payment. Don’t forget the interest rate.
Pay More Than The Minimum
Paying more than the minimum hacks away at the principal. You can add to a current minimum payment if you’ve already scheduled that into your monthly budget.
Close Accounts As You Pay Them Off
Another technique is about getting rid of temptation. Once an account is paid off, it’s a good idea to consider closing it down. Only keep the ones open that you can manage responsibly.
However, you need to consider your credit score here.
This tip is really a bit of a balancing act because keeping older credit accounts open helps to boost your long-term credit history and credit score.
As you might have already guessed, there’s a strong relationship between your credit balances and how much risk you present to lenders.
How does a person’s credit score impact their ability to address growing loan and credit card balances?
Loan balances and credit scores are interconnected. Carrying unpaid balances and missing payments affect your credit score. That, in turn, affects your ability to get more credit. Remember, your credit utilization scores are another big indicator to lenders. So, maxing out all of your available credit also adversely affects your numbers.
Long story short your credit score is also affected by the amount of money you currently owe on accounts. It’s important to keep in mind these scores can give lenders an impartial snapshot of your file and influence future lending decisions.
Remember that each lender usually has their own benchmarks for what a good credit score is. While there’s no magic number, Equifax does mention that people with three digits lower than 660 will have a hard time qualifying for a loan.
Need Help With Growing Credit Card and Loan Balances?
Mortgage Broker Store specializes in various mortgage-related products. Mortgage requirements that don’t meet those from traditional lending institutions are a priority. We have private lenders, brokers, and licensed mortgage agents ready to look after you. Let us help you prepare for and get a private loan that suits your needs. Email firstname.lastname@example.org or call 416-499-2122.