Over-exuberant Christmas shoppers only have months to get control of their overspending before higher interest rates risk further complicating their lives, credit counselling experts warn.
With Canadians swimming in debt, forecasts of higher interest rates midway through 2010 could push more people over the edge by hampering their ability to pay off expenses.
“It's a huge concern,” says Laurie Campbell, executive director of the non-profit counselling service Credit Canada.
Those most at risk are homeowners who must renegotiate their mortgages. Higher rates would increase monthly payments, leaving less to pay other debt.
Spending by Canadian households averaged $71,360 last year, 2 per cent more than in 2007, with shelter representing about 20 per cent of the load.
The Bank of Canada has repeatedly warned of late that record household debt is the biggest risk facing the country's financial system. Bank Governor Mark Carney said that up to 10 per cent of households could face difficulties in meeting monthly payments when interest rates rise to normal levels.
However, an estimated 40 per cent of mortgage holders with high debt payments could increase their flexibility by suspending accelerated pay-downs on principal.
High interest rates have a major effect on a person's cash flow, said Paul Salewski of Ottawa-based financial, credit and debt counselling agency Doyle Salewski. A doubling of mortgage rates to eight per cent would, for example, increase monthly payments by nearly $500 for homeowners with a $200,000 mortgage.
“All of a sudden they're maybe have to increase their payments or who knows what they have to do in order to get by,” he said.
Since it's too late to avoid the commercialization of Christmas, credit counsellors suggest people look at strategies for dealing with their spending spree as soon as the holidays wind up.
Recommendations include tackling high-interest credit card debt first — obtain a line of credit or consolidation loan if possible, stick to a spending budget and try to amass an emergency fund.
Whatever you do, don't rack up more credit card charges as you develop a plan of action to tackle debt.
Ms. Campbell said there's no need to have more than one or two charge cards. Paring the number of cards over time will also limit the ability to make foolish decisions.
Despite increased restrictions, she expects that more Canadians will turn to bankruptcy to address their financial problems in 2010. Among them will be high-income earners who have begun to seek credit counselling in greater numbers.
“I think it's really important for people to understand not to panic,” Ms. Campbell said, adding that help from counsellors is available.
Mark says a huge weight has been lifted off his shoulders since he sought such help to address $10,000 of debt he had amassed following his divorce several years ago.
“I just didn't know how to quite handle my new freedom,” he said in an interview.
His credit woes caused him mental anxiety, depression and loss of sleep.
The 56-year-old caretaker said his problems worsened when he turned to pay-day loans to accommodate his increased spending on cigarettes, alcohol and general living expenses.
Every two weeks he would pay $25 interest for each $100 borrowed at a store-front operation in Toronto.
“You get to a point where you have to borrow again to get yourself back to where you were,” said Mark, who didn't want to be identified.
Consolidation of his debt and regular monthly payments should allow him to resolve his financial problems and re-establish his credit within two years.
“As long as I keep a handle on it, it's OK.”
