What happened? We were doing so well!
A new report from TransUnion shows that while Canadians might have been successful at bringing our debt down for a little while, we’ve been backsliding some. And now, our debt levels are at the highest they’ve been in eight years – and maybe more. TransUnion has only been reporting on debt levels since 2004.
The TransUnion report was released last week, and it showed that the average Canadians’ debt, not including mortgage or second mortgage debt, has reached $26,221 in the second quarter of this year. That might not sound like much, but it’s up $192 from last quarter and it’s the highest our debt has been in at least eight years. It’s also something to take very seriously because it’s the second quarter in a row that our debt has risen. And this is after nearly two years of bringing our debt down; and a year of bringing it down quite aggressively.
So what happened? Quite simply, when everyone was worried that interest rates were going to skyrocket, they started borrowing less and paying more towards their debt. But now, the Bank of Canada has indicated that rates are going to remain low at least for the next year. And Canadians know that when they rise, they’re not going to jump a huge percentage anyway. So, what’s the rush to pay it all off?
Thomas Higgins, vice-president of TransUnion, says, “Not that consumers feel more comfortable, they might be thinking that they are due to buy a new car. Plus, there are more deals out there and more advertising.”
Mr. Higgins also thinks that there’s real reason to worry, despite the fact that the rate of bankruptcies is at an all time high and that Canadians seem to be repaying their debt on time.
“The big concern,” he says, “is that at these levels, individual Canadians may not have the financial safety nets to absorb unforeseen economic shocks or to be able to weather the storm as long as they did in the past.”
But paying off our debt is a double-edged sword. Yes, we’ll bring our debt levels down and that ultimately will be better for the economy. But will it? Truthfully, the economy couldn’t handle us all paying off our debt at once. So says Ben Rabidoux, analyst with M. Hanson Advisors.
“You can not have everyone in Canada pay off their debts at the same time because that will drag on the economy,” he says. “It is a strange dynamic. How do you pay off the debt when paying off the debt itself becomes an economic headwind?”
That may be true, but it doesn’t mean that we can’t all chip away at our debt little by little. So while there’s no pressure right now to go out and pay off your car loan in full, or to pay off all your credit cards tomorrow, all Canadians need to remember to continue to work at their debt. Interest rates after all, will go up one day, and no one wants to be left behind when they do. And isn’t saving for retirement or just spending on the things we want better than using it to lower our debt? That alone is good enough reason to continue to keep working on it, and maybe get a better report next quarter.
