Debt levels continue to rise

It seems to be almost everywhere these days and affecting almost everyone. Debt is a little four-letter word that quickly is growing in households across the nation, raising concerns that it may jeopardize the retirement of many Canadians.

It seems to be almost everywhere these days and affecting almost everyone.

Debt is a little four-letter word that quickly is growing in households across the nation, raising concerns that it may jeopardize the retirement of many Canadians.

A recent report by the Certified General Accountants Association of Canada (CGA) found that the national household debt has increased to $1.3 trillion, in part because many Canadian families are using credit to cover their day-to-day expenses.

The report had a number of disturbing findings.

Eighty-five per cent of households have outstanding debt on a credit card and 21 per cent of Canadians who were in debt at the time of the survey said they could no longer manage it.

Forty-nine per cent of families with children under 18 said their debt had increased in the last three years. Twenty-five per cent of Canadians interviewed admitted that they would not be able to handle an unforeseen expense of $5,000 and 10 per cent would have trouble with an unforeseen cost of $500.

The report said the rise in debt levels of Canadian families is disturbing and is being caused by consumption rather than asset accumulation.

“Many Canadians are not aware of how the economic downturn has impacted their financial situation and continue to load up their credit card and lines of credit while committing few or in some cases no resources to savings,” said CGA Canada president and chief executive officer, Anthony Ariganello. “Household debt has increased significantly over recent years, jeopardizing the financial security of Canadian households.”

The CGA report also reinforced what many other studies are showing — that Canadians increasingly are becoming concerned about the financial security of their retirement.

A study by RBC found that the percentage of Canadian baby boomers who say reducing debt is a top financial priority has doubled recently to 62 per cent from 31 per cent.

At the same time, 50 per cent of boomers are changing their views of retirement because of the current economic recession.

Twenty-five per cent say they will have to work longer than expected, 20 per cent believe they might not be able to live the lifestyle they thought they would have in retirement, and 14 per cent say they’ll need to do more financial planning.

Not all debt is the same. Financial experts like to differentiate between good and bad debt.

Good debt includes anything that is too expensive to pay cash for but is something that you need or might be considered a good investment, such as a house, which usually rises in value over time.

Bad debt is any form of debt with a high interest rate for things you don’t really need or can’t afford, such as charging an expensive vacation on a credit card. The worst form of bad debt is credit card debt because it carries the highest interest rate.

If you can’t solve your debt problem by budgeting, you may need a debt management plan (DMP).

A DMP is designed for people who can afford to repay their debt but need help negotiating with creditors and time to get back on top of their financial situation. It’s a voluntary agreement between you and your creditors arranged by a credit counselling agency.

The agency pools your unsecured debt together so that you make a single monthly payment to the agency, which then divides your payment among your creditors, with the largest creditors getting a bigger share of the payment.

A DMP gives you a single monthly payment. Then it reduces and sometimes can even eliminate interest charges and relieve you from receiving nagging calls from collection agents.

In most cases, creditors will agree to waive most or all of the interest, so all payments go toward paying off principal, which reduces the debt faster.

Depending on individual circumstances, a DMP may be a great way for many Canadians to get relief from the increasing level of debt they are incurring during these difficult economic times.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.

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