Debt can be heavy load
Credit cards can be most crippling, especially to the younger generation
TORONTO - People are digging themselves deeper into the debt hole and worse, many don't seem to have any realization just how much they owe and how high credit card interest rates are crippling them.
This is happening at a time when consumers should be paying close attention to debt as the Canadian economy slows because of the steep U.S. downturn, which could in turn make jobs less secure.
Many consumers believe that when the Bank of Canada and the U.S. Federal Reserve Board lower general interest rates, that boosts their pocketbooks and reduces the debt they owe.
While that may be true for consumer loans and some prime-linked mortgages, that's not the case for credit cards, where rates run around 18.5 per cent a year, nearly triple average borrowing costs.
Department store credit cards have even higher rates in many cases.
"I think people are not understanding debt loads," said Elena Jara, a spokewoman with Credit Canada, a non-profit credit counselling organization.
Her organization counselled 55,000 people during 2006, and the average client carried eight credit cards.
"They figure, well, if I get into debt now, it's not a problem I can carry it."
Further, recent research indicates this could be a generational issue.
"This is especially true with young people," said Dr. Sunghwan Yi, professor of marketing and consumer studies at the University of Guelph in southwestern Ontario. People tend to think about kind of what they can buy and don't really think about how they can spend."
For example, a study at the end of last year commissioned by Mackenzie Investments and done by Decima Research showed that 60 per cent of those surveyed under 50 agreed that they had bought things to make themselves feel better, against 47 per cent of those more than 50.
And 47 per cent of those asked who are under 50 agreed that they had bought things without considering the long term impact of the purchase, versus 26 per cent of those over 50 years old.
Yi says the root of the problem is very simple: the great availability of credit along with low low introductory teaser rates that many credit card issuers use to boost their customer base.
"Starting from the early to mid-1970s, credit cards have become much more widespread. Until the 1960s, credit cards were not widely distributed," he said.
"Not only that but also banks have become more generous in giving out credit to consumers."
There's also the social aspect.
"There is also less disapproval about overspending and impulse buying," he observed, "I think most of us feel that it's natural to buy things from time to time and people don't point a finger at you."
On top of this, Yi noted that many consumers simply do not understand how interest rates work.
"People really do not understand how credit card companies earn their income," he said.
Unlike banks and other lenders who issue credit cards, companies such as Visa and Mastercard don't carry consumer debt on its books. They depend on transaction fees, which have been steadily rising for years, even during the last two economic downturns in 1991 and 2001.
With debt growing through good times and bad, some consumers could get to know Jara's organization once things get out of hand.
"The main signs would be you're juggling with your regular monthly bills, so some of them get paid over other ones," she said.
"For example, you're going to pay rent but not going to pay the utilities."
She said other signs of desperation are when consumers use their credit cards for cash advances and when they are able to afford only minimum payments on their card balances.
A new client dealing with Credit Canada will find the service offers a regimen of tough love that involves surrendering credit cards.
But at the start, "when a client comes in we're very detailed and we really try to explain the importance of all their financial actions and the impact it will have on their credit record," Jara said.
The counsellor said she tries to explain why consumers really don't want to declare bankruptcy if it's at all avoidable.
"We explain to them how their credit rating is going to drop basically from whether they're a one, three or five, it will go to nine and stay there for six years plus nine months because of the nine-month bankruptcy process," she said.
"We also explain that if they were thinking of applying for student loans, they would not qualify. If they were thinking of working for a financial institution, that may not work out for them anymore. And we also talk about how difficult it would be to find an apartment. A mortgage would be difficult because they would be considered high risk."
Jara explained that Credit Canada will act as a broker to a payment schedule with credit card companies or banks.
This includes working with the Canada Revenue Agency if a person has also fallen behind on taxes.
"We will step in and maybe write a letter for the forgiveness of debt that they have," she said.
"We're here to inform them of their financial options. We're here to step in and mediate, maybe write a letter on their behalf, maybe call a creditor and work out something between them, inform them of their financial rights, their consumer rights, getting a consolidated loan, maybe refinancing on their mortgage, explaining what that means to them financially and it's absolutely free."
The organization gets money from the credit card companies since they realize that at least they're getting a good chunk of the money back from the debtor.
Jara also has to explain to clients that there are no overnight solutions -- that it will take time to dig out from the hole.
And that can be tough in an age of instant gratification.
"But throughout the time you're on a debt repayment program, you will have learned to live within your budget, you will have learned to budget properly, you will have learned to even save money as well as may be set new financial goals for yourself that are now more realistic and obtainable."
Jara also pointed out that there are similar, non-profit outfits to across Canada.
You can phone the Toronto office at 800-267-2272 from outside Toronto or email them at info(at)creditcanada.com.
In the meantime, there are some simple things you can do to prevent manageable debt from becoming a monster that deprives you of your sleep. "Sometimes, the simplest ideas are the best ways to curb overspending and improve your ability to save for the future," said Dr. Yi.
"I recommend creating a spending and saving budget with detailed shopping lists and spending limits, walking away for at least 24 hours, when you feel the impulse to buy something that isn't on your list."
Also, shop around for your credit card. It's quite possible you should be using a credit card that charges an annual fee, which usually means a substantially lower interest rate.
And if you can't pay off your balance every month, don't think you can get away with just paying the minimum payment every month -- it will take you much longer to get out of the hole. Always pay off as much as you can.
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