The debt bomb ticketh

             I had one of those credit card bills in January that made me get a little teary eyed.  After rubbing my eyes for a few minutes, I slowly regained my focus and began to scan the bill to see if a mistake had been made.  I’m sure it happens. Maybe they accidentally added too many zeros.  Maybe I was a victim of identity theft?  But no, I was only the victim of my own greed (cue dark music).

            After a thorough examination of my family’s fiscal health, which involves looking at a near-empty bank account, there came the realization that this could not continue.  Our family would have to declare 2015, THE YEAR OF AUSTERITY. 

And so after our trip to Hawaii (it was just a short trip on a shoe-string budget, really), we committed to cutting spending and following our budget a little more closely.

Don’t get me wrong, if there’s anyone more anal about monitoring our finances, it’s me.  (And if there’s anyone who could tell you how much 100 grams of croutons cost at Superstore versus Extra Foods, it’s my wife.)  I could even tell you how much we spent on our cat in 2008 (it was a bad year, let me tell you – how can it possibly cost $300 to declaw a cat??)  For me, money management can also become an obsession.

            Fortunately, this has also meant I’ve never had to pay interest on a credit card.  Credit cards are only useful for the points, after all. Whether they involve travel rewards or hard cold cash, you gotta love the points.

Exercising fiscal restraint in Hawaii.

For those of us who redeem them to travel to tropical paradises, we can thank the thousands of Canadians who pay their credit card’s exorbitant interest rates each and every month.  According to one survey, about half of Canadians often or always carry a balance on their credit card.

Whether credit card or other debt, the average Canadian now holds $21,000 in non-mortgage debt, a seven percent year-over-year increase, according to a recent report by Equifax Canada.  Seeing as one third of Canadians has no debt at all, another third is likely holding over $40,000 in non-mortgage debt.  Combine that with the ginormous mortgages that Canadians have, and it becomes a little scary. 

Total household debt, including mortgages, has hit a new record of 163% of disposable income, which is just about at the lofty heights reached by Americans before the crash of 2008.  Back in 1990, average household debt in Canada was at around 85% of disposable income.

Of course the US had more issues than just debt that caused the great housing crash, but you have to expect that what goes up will eventually come down.  With the Bank of Canada estimating that Canada’s housing is 10 to 30% over-valued (Deutsche Bank estimates it’s 63% over-valued), there may not be a “soft landing” for some who have just bought that $400,000 three-bedroom bungalow.

            Being indebted is pretty normal for our society.  Buy a new car and you’ve got yourself a hefty loan.  Go to university for a few years and the debt piles up faster than all those unused text books. 

            But it’s got to a point now where a small economic shock or an increase in interest rates could make payments quite unmanageable for a large segment of our population.

            When will that time come?  I wouldn’t hazard a guess.  I locked in my mortgage rate three years ago thinking that was the last of low interest rates.  But the cheap money just keeps on flowing. 

            The Bank of Canada dropped rates again, and by doing so, said not so explicitly to all Canadians, “Go ahead, borrow some more!  Don’t worry, you’ll pay it back later… some day!”   

            But just like the post-Christmas credit card bill, that day will eventually come (cue dark music).