Causes of bad debt: how Canadians can find themselves in financial difficulty

Posted on 10 January 2022

Written by Colin Boulton

Nowadays, many Canadians are carrying some form of debt with them. In fact, the average Canadian consumer debt is $20,739 excluding mortgages, reflecting how common debt is truly becoming. This is a lot of money to owe to creditors, and it does not even factor in the often high interest rates on top of the debt. All of this debt continues to increase across the country, in turn making it very difficult to pay off alongside a rising cost of living and rising interest rates. Credit card debt is particularly high in Canada, perhaps due to how easy it is to make frivolous purchases and worry about them later on. Credit cards carry notoriously high interest rates, which make them especially difficult to repay. So, what are the causes of bad debt in Canada? And what are the best ways of controlling debt? In this article, we will discuss the primary reasons for bad debt in Canada, and how you can gain debt relief if needed.

Misuse of credit cards

Arguably the most common cause for bad debt in Canada is credit cards. This is often because of the misuse of credit cards, using them at any opportunity without respect for the limits. It is all too easy to take advantage of the convenience of credit cards and worry about the problem later. The benefits and rewards of using credit cards can also be encouraging to overuse credit cards. Not being careful, however, can create bad debt. Spending above your credit limit or missing payments can quickly spiral. Credit card debt specifically is difficult to manage due to high interest rates of up to 22%, which can soon rack up. For this reason, it is so important to keep on top of credit card debt and make payments in full each month where you can. Learn more about how to pay off credit card debt.

Unexpected life events

Although reckless spending is the most probable cause of debt, many Canadians can get into debt due to life circumstances. This includes situations like job loss, expensive vehicle repair bills, or a reduced income which can lead to increased borrowing. Equally, a life event like the breakdown of a relationship or a divorce can be costly. Even a medical emergency or discovering you have a condition can lead to time off work or the sudden need to pay for medical care. Causes of bad debt can truly happen to any of us. For this reason, it is so important to learn how to budget efficiently. The skill of budgeting will help to keep funds aside for an emergency, and it will also help you to reign in any unnecessary spending and understand your means.

Missing debt payments

Unfortunately, missing even one payment on your owed debts can cause issues. Just some simple forgetfulness can cost you in interest or additional fees. The more payments you miss, the more these additional costs will rack up and make your overall debt even more difficult to repay. For assets like mortgages or car loan debt, missing payments could ultimately lead to your property or vehicle being repossessed. Setting up a direct debit for your debts each month can make life much easier by automating the process so that you do not have the risk of forgetting. If you are missing debt payments because you are struggling to find the funds, you may need another solution. Book a free consultation with Spergel and discover how we can put you on the pathway to a fresh financial future.

Lack of savings

It is always a smart move to have some money saved for any emergency events, or for bigger purchases. After all, none of us know exactly what the future can hold. In order to be as prepared as you possibly can be, check out our tips on how to save. Having some backup funds can really pay off in these events, and it is an important life skill we should all develop. The alternatives for not having any savings could mean opting for payday loans or credit card debt. Both of these options usually carry extortionate interest rates. Failure to repay your debts on time can soon rack up, and you could find yourself in a really bad financial situation. If you need help with learning to save, at Spergel we can support you with money management and credit counselling.

How to avoid bad debt

Now we know the causes of bad debt, it is time to consider how we can avoid getting into bad debt. Here are our top tips for avoiding the causes of bad debt, and how to reduce your debt if you feel your financial situation is spiralling.

  • Spend within your means. Because money is not tangible when spent using credit cards, debts can quickly escalate and become unmanageable. For this reason, you need to be spending less than you actually have in the bank. Abandoning your credit cards and using cash instead may encourage you to think twice before spending.
  • Create a budget. Having a plan for your spending is crucial – as an analogy, you would probably not start to make a cake without following a recipe. Creating a budget is simple and will really help you to understand your financial situation, from all of your income to controlling your outgoings. You should pinpoint a few key financial goals to help you keep motivated and make sure you stick to it.
  • Stick below your credit limit. This step is crucial – you should not spend anything over 30% of your credit limit. Spending your entire credit limit suggests to banks and lenders that you are unable to spend within your means. It will also make repaying your credit card debt much more difficult. It could also have a negative impact on your credit score if sustained. Keeping your credit utilization rate down can have an opposite, positive effect.
  • Stay current on your bills. Paying your bills on time and in full is a key way to stay clear of bad debt. Make sure to set up monthly direct debits if you have a habit of forgetting to make your payments on time. This way, you will avoid late charges and penalties, dodge a pathway to spiralling debt, and keep your credit score as healthy as possible.
  • Begin an emergency savings fund. Having some backup funds is an essential part of anybody’s financial security. Who knows what the future can bring? As we saw above, one of the key causes of bad debt is unexpected circumstances which can happen to anyone. Having some emergency savings means that you are better prepared no matter what the future holds. Around six months of essential bills is a good goal to save.
  • Speak to a Licensed Insolvency Trustee. Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. This includes consumer proposals, which can reduce your debt by up to 80%, and also bankruptcy. If you are struggling with debt and are unsure of what to do next, you should speak to a reputable Licensed Insolvency Trustee. They will review your financial situation with you and recommend the best pathway for debt relief.
  • With debt growing across Canada and various causes of bad debt, you should be reassured that there is always a form of debt relief, no matter what your financial situation. At Spergel, we have helped over 100,000 Canadians just like you to gain debt relief. Book a free consultation with one of our reputable Licensed Insolvency Trustees today and begin your pathway to a fresh financial future.

Colin Boulton

Colin Boulton is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on unemployment and wage garnishments and manages Spergel's offices in Eastern Ontario (including Oshawa, Peterborough, Lindsay, Ajax and Scarborough). When not at the office helping clients cross their debt-free finish lines, Colin enjoys training for and participating in triathlons.

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