Canadian Personal Debt Concerns Paralleling America's

Rising interest rates have been a concern for potential home buyers, lenders, and investors in the United States in the last few months. On Thursday, Canada's Credit Counselling Society detailed the same concerns for America's amiable bordering nation to the north.

For the first time in more than a year, Canada's central bank, the Bank of Canada, has raised its federal funds rate, the interest rate that affects all other interest rates in a nation, as it sets the overnight interest rate that regional and local banks must pay to receive an influx of cash from the central bank. There is another possibility of a rate hike again in early September.

Like their American neighbors, whom they are known to criticize for living above their means, the Canadian people have been borrowing and spending a lot of money in the relentless pursuit of the good life. Canadians generally have a heavy debt load and a lot of mortgages out, including a lot of variable mortgages which start out with very low interest rates in the first couple of years but then become pegged to the bond market later on.

Acquiring a debt load in order to acquire what you want is not necessarily a bad thing. Economists call it "deficit financing". However, deficit financing cannot be undertaken and managed without reflection. Unreflecting borrowing or reliance on revolving credit, which is easy to fall into in good times when interest rates are low, leads to personal financial disaster.

Again mirroring the situation of its southern neighbor, Canada's average mortgage rate has shot up, going from 6% to 7.24% in the last 12 months. Some Canadians are finding themselves in over their heads with their mortgage load and other debts.

Canadian personal debt is up 27% from what it was in 2003.

"If rates continue to rise to offset inflation those consumers servicing a heavy debt load could be caught short. It is a double edged sword. Inflation means higher costs for goods and services which can place a strain on the average household income. Higher interest rates are needed to slow this inflation and that can place pressure on consumers if they are not in a strong financial position to pay the increased costs of borrowing," Scott Hannah, President of Canada's Credit Counselling Society, said in the press release.

As their American counterparts have so often been learning the hard way, Canadians who have a lot of debt should put themselves on a controlled budget. This begins with a household listing monthly expenditures, including mortgage and loan payments, taxes, insurance, food, transportation, and utilities. Additionally, a calculated amount of money should be set aside for seasonal expenses; Canadian Winters can be harsh and snowy, so more money should probably be set aside for use during the colder months of the year.

When considering singular expenses or events, like interest costs increase, it is important to review the budget and see if there are spending adjustments to be made. Consumers who think they are "supplementing their incomes" through the use of charging things on credit or taking cash advances against their credit cards and only paying back the minimum monthly requirement cuold cause themselves future financial hardships.

Sources of information used to research this news story:

Canadian Credit Counselling Society (Marketwire), "Rise in Interest Rates Puts Pressure on Consumer Debt Load"