Is a consumer debt disaster on the horizon?

Many Canadians are getting deeper and deeper into debt while doing what they think is a good thing — trading credit card debt for lines of credit.

OK, you just survived the holiday season. It was fun but the credit card bill is about to arrive. Does the thought of opening the mail distress you? Will you be able to pay the balance when it’s due?

According to the Canadian Bankers Association, 70% of Canadians pay off their credit cards in full each month and therefore pay no credit card interest. That means almost a third of us are revolvers, those who can’t afford to pay them off.

If you, or someone you know, has revolving credit card debt at a high rate of interest, there are a few simple steps that can be taken. The first is to call your credit card issuer and cancel your gold card and replace it with a basic card without features such as airline points. You can cut the cost in half very quickly as the basic cards charge much lower rates.

Better yet, shop around for a balance transfer offer from another credit card company. In the past year, I have received unsolicited offers ranging from zero interest for a year to 3% for six months. If you have a good credit score, you can easily find and apply for cards that will accept a balance transfer. Go to and click on balance transfer for a list of options. When I last checked, there was an offer for a Scotiabank Value Visa Card at 0.99% for six months for balance transfers.

Why do credit card companies make such offers? They are willing to take the financial hit of low or no interest for a period of time because they know the person involved is unlikely to change his or her habits and be able to pay off the balance. The new credit card company then becomes the one collecting the high interest after the transfer period is over. So make sure you have a plan for when the introductory period expires. Pay off the balance beforehand, or make another transfer to another low rate card.

But let’s look at the 70% who pay off their balances. Where do they get the money? Some no doubt are fiscally responsible and simply have enough money to pay the balance because they spend less than they make. But I would hazard a guess that these people are in the minority.

Many of them must be using their lines of credit to do it. This fact is born out in the latest statistics from TransUnion, one of the credit bureaus in Canada (the other being Equifax). According to TransUnion, the average consumer debt, excluding mortgages, held by Canadians during the fourth quarter of 2013 was $27,368. For people with credit cards the average balance was $3,720; for those with lines of credit, however, the average balance was $33,363.

The worrying conclusion is that many Canadians are getting deeper and deeper into debt while doing what they think is a good thing — reducing the interest rate on their debt by trading credit card debt for lines of credit. Trading $5,000 of credit card debt at 20% interest for a line of credit at 3% is obviously a prudent move. However, if the person then continues to spend more than he or she makes and runs up the credit card debt again to $5,000, he or she ends up $10,000 in the hole with half at a low rate and half at the high rate.

The trend to line-of-credit use is fuelled by the current ultra-low interest rates. Why pay the line of credit down when it’s so cheap to carry it? Low rates, however, should provide an opportunity to pay down balances, not increase them.

What will happen if rates rise even a few percentage points? It will make it increasingly difficult for people to pay off the debt when it compounds at a higher rate. Rising rates are also a major problem for those who are retired. If rates do rise, how are retirees going to afford possibly significantly increased interest payments on a fixed income?

I have always been of the opinion that retiring debt-free is the best bet to ensure a comfortable retirement. That’s because it means the monthly payments required after retirement will be much lower since there are no more mortgage and other debt payments.

How is the message going to get through that debt, even at a low interest rate, is a bad thing and needs to be eliminated? I think it’s up to us accountants to spread the word. It will be an uphill battle but it needs to be fought or we’re heading for a consumer debt disaster sooner or later.