Low-income, young racking up debt at record pace

TheStar.com – Business/moneyville.ca/article
Tue Jun 14 2011.    By Madhavi Acharya-Tom Yew and John Spears

Low-income and young Canadians are racking up debt more quickly than seniors and those with higher incomes, according to an extensive study released Tuesday.

The annual study by the Certified General Accountants Association of Canada also found that household debt has hit a record high of $1.5 trillion.

That means if household debt were spread evenly among all Canadians, a family with two children would owe an estimated $176,461, including mortgage costs.

“Despite the recession and very sensitive recovery, total household debt has continued to increase,” said Rock Lefebvre, vice-president of research and standards for CGA-Canada, and co-author of the report.

Nearly half of lower income respondents, those with incomes under $35,000, reported their debt increasing, compared to one-third of higher income respondents, the study found.

Four-in-10 of respondents ages 35 or younger also said their debt increased.

Andrea Duffield of Toronto can speak from hard experience about the debt treadmill that low income families can face.

After breaking up with her common law husband, she found herself caring for four children, first in a shelter and then moving out on her own.

“I had nothing but the diaper bag when I left,” she recalls.

Duffield ran up credit card debt buying new home furnishings after she moved out on her own, as well as paying for living expenses.

Since she’d been a stay-at-home mother, she had no income of her own, and relied on child support payments and the child benefit tax credit to get by.

But that still left her below the poverty line:

“It doesn’t even get you everything you need, especially when you’ve got kids. There’s a lot of extras: School stuff and winter gear and Christmas and birthday.”

As the credit card payments mounted, she didn’t have the income to cover them.

“It just got to a point where I’d have to not pay one bill in order to pay another bill. That’s where it all began.”

After she had run up her debts to about $15,000, she went to a credit counsellor in 2008, and ultimately had to declare bankruptcy: “There was just no way to get that debt down.”

While seniors may not be racking up debt as quickly, more of those aged 55 and older are carrying debt into retirement, according to the study.

About one-third of seniors are retiring with an average debt of $60,000.

“Seniors don’t have time to make it up and young people can get into such a debt spiral that it takes a lifetime to get out of it,” Lefebvre said. “It’s not only a financial matter. It’s a societal issue.”

Nearly six in ten respondents said day-to-day living expenses are the main cause of their increasing debt.

The study also found that homeowners now owe an average of 66 per cent of the value of their homes, up from 57 per cent in 2009.

“People find comfort in the fact that at least a mortgage is backed by a major asset, but we actually hold less equity in our homes than we used to,” Lefebvre said. “We may be lulling ourselves into a sense of comfort that really isn’t there.”

The study also revealed that:

37 per cent of respondents said their debt has decreased while 35 per cent said their debt load increased.

Nearly two-thirds said they are managing their debt well, while 18 per cent said they have too much debt and are having trouble managing it.

The single parent family is the only category where debt increases with age. These families have two-thirds more debt than couples with no children.

Debt-to-income ratio reached a new record high of 146.9 per cent in the first quarter of 2011, up from 144 per cent in late 2009.

Personal lines of credit of chartered banks grew by 2.6 per cent over 2010 and the first quarter of 2011 – more than 6-fold the rate registered in 2008 and 2009.

About one-quarter of Canadians do not save at all, even for retirement.

One-in-five Canadians would not be able to handle a sudden expense of $5,000. One-in-ten would have trouble dealing with an unexpected expense of $500.

Chunky numbers

49 per cent: respondents who did not contribute to a Tax-Free Savings Account

22 per cent: don’t know what a Tax-Free Savings Account is or how it works

38 per cent: renters who regularly save for entertainment purposes

19 per cent: renters who are saving for a down payment.

38 per cent: respondents who feel they will not have enough savings at retirement

17 per cent: respondents who say they have no debt

Source: Certified General Accountants Association of Canada

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