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We will be exploring Credit cards and their advantages and disadvantages to Families!

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Credit Cards and Its Advantages and Disadvantages to Families

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Credit Cards and Its Advantages and Disadvantages to Families

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By: Alex Doyle & Alex Chipman

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Upon our research we found a slide show providing some detail about the advantages and disadvantages of credit cards. These can be generalized with families as well. Some of the disadvantages are commonly known, for example interest rates can be high and increase the amount you owe, and it is especially easy to overspend when using a credit card.
Having a credit card in general can be difficult, with a family it is a lot easier to overspend because you say to yourself, "Oh, ill just pay it off" when in reality you either forget about paying it off or you use your money for "more important things". This causes a domino effect, since you forget to pay off your card, you end up paying more due to interest.

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In 2016, Ontarians owed $1.71 for every $1 of income. Doing some quick math, if a families income was $50,000/year, their debt, multiplying the yearly income by the owed income, a family would have an extra $35,000 of debt. Leaving only $15,000 to spend on activities, car payments, groceries etc. This is also before it being taxed which would leave you with less. Obviously not all this debt is due to credit cards, this could be mortgages, car payments, line of credits etc. Still leaving it shocking to see these types of numbers.

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Although this picture dates back to 2016, the message and statistics are still relevant even though the dollar values may vary. The chart breaks down the average amount of debt, not including mortgages, each age group is in. As most debt comes from credit cards, these numbers give an insight to just how much debt Canadians are in. Debt adds incredible amounts of stress on people and families. Having a budget and responsibly paying off credit cards can keep these numbers as low as possible, no matter your age

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Scott Terrio put together this article about how "Drowning in debt is the new normal in Canada". He found that there were several cases where people whom seemed like they would not have a lot of credit card debit or debit in general were some of ones with bad credit. For example, he came across some of these files, "a staff accountant with multiple lines of credit, several maxed-out credit cards, a big mortgage, a significant home-equity line of credit (HELOC) and two leased luxury cars; a TTC driver with two mortgages and $100,000 in unsecured lines of credit; a teacher with eight payday loans and a senior financial analyst at a chartered bank with seven credit cards, all carrying high balances." Reading these we were shocked that this was the case but started to understand how easy it is to go into debt. Now-a-days debit is normalized and many do not seem to be ask worried by it until it gets out of hand and they owe thousands of dollars. Also over the years credit card rates have gone down to lower interest rates, but since they are unsecured, the debt spikes back up within a year making it hard to pay off. Reading this article was a very big eye opener.

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On any given day now you can expect to hear at least one economist, public official or financial commentator express grave concern about the mountain of debt Canadians now carry. The bloated debt loads of Canadian households has become a pervasive topic in media. But for all the attention the subject has received, it's a safe bet that most people still cling to very clichéd notions that only so-called "deadbeats" ever hit the debt wall. Nothing could be further from the truth. The reality is Canadians would be shocked if they could peer into the private financial lives of many of their closest neighbours and friends.

As a licensed insolvency trustee firm, our practice is on the front lines of Canada's household debt binge and the bad personal finance habits that ensnare so many people. And what we see every day is that the majority of those grappling with serious debt trouble are the most typical individuals and families you could imagine.

Here is just a sample of recent files that have crossed our desks: A staff accountant with multiple lines of credit, several maxed-out credit cards, a big mortgage, a significant home-equity line of credit (HELOC) and two leased luxury cars; a TTC driver with two mortgages and $100,000 in unsecured lines of credit; a teacher with eight payday loans and a senior financial analyst at a chartered bank with seven credit cards, all carrying high balances. I could go on and on.

Those disturbing financial cases are no longer the extreme end of the spectrum that they were at one time. They are the "new normal" in our trustee practice. The real horror stories are far worse, albeit less frequent.

READ MORE: How Canada completely lost its mind over real estate

The normalization of excessive debt is reflected in the data that Statistics Canada regularly releases. The household debt-to-income ratio now stands at 169.4, up 23 per cent from a decade ago, and on par with what the U.S. saw at the peak of its housing bubble. Of course, such figures are averages. According to the Bank of Canada, close to half of all high-ratio mortgages originated in Toronto were to borrowers with loan-to-income ratios in excess of 450 per cent.

A growing number of the clients we see have all the trappings of a middle class lifestyle-they're gainfully employed, own a home and from the outside seem fiscally responsible-but it's built on a foundation of debt and bad financial decisions. Many cases involve large tax arrears, such as a real estate broker who owes $383,000 to the Canada Revenue Agency in unpaid income tax. Others involve failed businesses. Then there are the frequent cases where financial companies inexplicably lend vast sums to underemployed people, even as their debt loads balloon out of control-in one case, a senior who emigrated to Canada 15 years ago, had never worked and been on a very low disability pension since shortly after arriving, owed more than $200,000 in credit card debt.

While the causes for these horror stories are varied and obviously complicated, there is almost always a common detail: Most clients in significant debt trouble today would not be in that situations had they simply funded their lives by cashflow instead of credit.

And that may be the crux: a decade of low interest rates has fuelled habitual credit reliance by consumers. Two or three decades ago, it would have been unthinkable for people to hold the equivalent of $30,000 or $40,000 (or more) in credit card debt. Yet now that has crept into the Canadian psyche as just something one does.

(By the way, have you noticed the "Estimated Time To Pay" wording on your credit card statement? It is a calculation of how long it will take to pay off your credit card balance if only the monthly minimum payments are made. The record we've seen is 330 years and 10 months. Don't forget, a credit card balance of as 'little' as $6,000 can take more than 40 years to pay off if only the minimum payments are made.)

A lot of credit card debt, of course, has in the last few years been shifted over to lower-interest lines of credit, usually unsecured. This Peter/Paul conundrum is interesting: we very often see examples where people have paid off their credit cards using available lines of credit, only to have their credit card balances swell back to where they were within a year or so.

READ MORE: Canadians can't stop lying to themselves about debt

Let me share a scenario of someone who is self employed, as it highlights how a debt problem can spiral out of control quickly. I met recently with a woman in her 50s who owns her own company that furnishes and decorates high-end businesses, like big law firms. Or at least it did. With big firms shrinking to meet reduced market demands and trimming costs, her business had dried up.

Her accountant brought her to me, and it was clear she had severely mismanaged her business and financial affairs, despite her accountant's warnings. We see this all the time-small business owners are typically very good at what they do, but very poor at handling day-to-day administration.

Here are some specifics that show how misaligned her lifestyle and business expenses were with the actual cash she was earning:

* Owns a townhouse: mortgage $600,000, estimated value $650,000

* Mortgage payments: $3,600/mo

* CRA lien against house for personal income tax owing: $98,000

* She had previously refinanced her house to help fund her business

* She had a prior bankruptcy 15 yrs ago-discharged

* Leased car: $51,000 owing

* Credit card debt: $75,000

* Business loan (personally guaranteed with a high interest rate): $45,000

* Outstanding debts to suppliers: $80,000

* Business rent owing (seven months behind): $11,000

* Net self-employment income: $3,500 per month, or $42,000 per year

The CRA lien is the big problem here. She can't sell or refinance her house with the existing lien unless she pays her back taxes, while in the meantime interest charges and penalties pile up.

Although this may seem hopeless, it is actually a straightforward personal bankruptcy scenario: She closes the business, any source deduction or HST owing is included in the personal bankruptcy filing, as are any personally guaranteed business debts. She walks away from her house and cannot be sued for any shortfall due to the creditor protection afforded by her bankruptcy. She will lose her house and business, but that almost certainly would have happened regardless.

I should point out that clients in this type of situation often insist on keeping their house, a reflection of the deep-seated Canadian devotion to home ownership, and it takes long and difficult conversations with family, friends and trusted advisors before they come around to the realization that they have to let go of their home.

Keep in mind that the above situation is very normal for us. This is something we see every week.

As stated earlier, the most troubling trend we see now is the flood of regular Canadians facing financial crisis. Households and individuals who are employed, have decent incomes, own homes and have done everything they feel they 'should' be doing now find themselves facing serious, if not insurmountable, debt problems. They are having to file insolvencies now, or will in the next few years.

READ MORE: The Bank of Canada's muddled message on house prices

There are possible alternatives to outright bankruptcy, of course. Often, if clients have serious debt problems but also decent incomes, they will attempt a consumer proposal to settle their debt legally through a licensed trustee. In effect, creditors agree to accept just a portion of what they're owed (which is more than they might get if someone is forced into a personal bankruptcy situation). This allows people to keep their assets (house, vehicles, investments, cottage, etc.) while eliminating unsecured debt they would otherwise have little chance to pay off in the normal course of life. The credit impact in a proposal is easier than a bankruptcy, and one can rebuild credit in a few short years. It's a growing option for debtors. In fact, about 50,000 Canadians file proposals every year, and that number is rising.

Increasingly, life has simply become too unaffordable for many. The temptation to spend is too great, and access to cheap debt too easy. When the gap between what people need or want, and what they can afford with their incomes becomes too great, credit is used to fill the gap. Interest kicks in, and the cycle begins. As credit card debt is shifted to readily available lines of credit, $5,000 becomes $15,000, and soon you're facing a $50,000 or $100,000 debt problem. A person living at or below the median income range simply cannot handle this.

Unfortunately, that's a lot more 'normal' than you think.

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Drowning in debt is the new normal in Canada - Macleans.ca

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On any given day now you can expect to hear at least one economist, public official or financial commentator express grave concern about the mountain of debt Canadians now carry. The bloated debt loads of Canadian households has become a pervasive topic in media.

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Chris Fournier of Bloomberg News wrote this article talking about the mass amount of credit card debt Canadian citizens are in currently, mainly due to the fact that a percentage of Canadians are not paying their credit cards off in full, causing them to have to pay delinquency fees. These rates and fees come as a penalty for paying a loan or payment late. The article states how the delinquent rates will probably begin to rise, meaning more late payments on the large amounts of outstanding debt, but debt will begin to slow down. The article also states that household credit is extremely high, even though the interest rates are historically low. It continues to say that the Bank of Canada intends to raise these rates, which will cause more money going out of the pockets of Canadians. We were very surprised to see that Canada's credit debt, excluding mortgage payments, is $599 Billion!

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Canadian delinquency rates, which have been declining since the last recession, will probably reverse and begin to climb by the end of 2018 as the central bank presses ahead with interest rate increases, according to the country's largest credit reporting firm.

Regina Malina, senior director of analytics at Equifax Canada, predicts late payments on the country's $599 billion (US$455 billion) of credit card, auto and other non-mortgage consumer debt will begin to move "modestly higher" by the end of this year.

"Our prediction is that we will start to see delinquency rates inching up a little bit, and debt probably slowing down," Malina said last week in an interview.

The delinquency rate - which measures the number of payments on non-mortgage debt that were more than 90 days past due - was 1.08 per cent in the first quarter, up slightly from the fourth quarter but still close to the lowest level since the 2008-09 recession.

The Toronto-based analyst declined to estimate how high delinquencies will climb, saying it depends on the pace of interest rate increases and what happens in the trade battle between the U.S. and Canada. She cited the experience in Alberta, where delinquency rates rose in some instances 20 per cent or 30 per cent on a year-over-year basis after the oil-price collapse. Such an extreme case, however, isn't what Equifax is predicting. "It will only happen if we start seeing deterioration in employment numbers," she said, adding delinquencies should remain "still very low," and "they're just going to start inching up a little bit, probably not double digits."

Change Coming?

Household credit has ballooned to unprecedented levels in Canada, as in many other developed countries, amid historically low interest rates. That hasn't posed too many difficulties so far, because the economy and the labour market have generated solid growth, allowing people to handle servicing costs. But with the Bank of Canada intent on raising rates and the U.S. and Canada engaged in a tit-for-tat tariff fight, that could change.

A red flag in the Equifax data was a decline in the share of people who completely pay off their credit cards each month. The 56 per cent who did so in the first quarter matched the fourth-quarter number and was down from as high as 59 per cent last year. It's a small but important detail, according to Malina.

"The changes aren't big, but when they're consistent and we see it for two or three quarters, we start to believe it," she said. "Given that less people are making their credit card payments in full, and those people are usually people with lower delinquency rates, we might be seeing overall delinquency rates deteriorating."

Consumer debt including mortgages was $1.83 trillion in the first quarter, up 0.4 per cent from the end of 2017 and 5.7 per cent from the same quarter a year earlier, Equifax said.

Excluding mortgages, Canadians carry an average of $22,800 each in debt. Some other highlights from the report include (all figures exclude mortgage debt):

Those between the ages of 46 and 55 have the highest average debt loads, at $34,100.

That age group is also seeing the largest increase in debt, year-over-year, at 4 per cent.

Of nine cities listed, Fort McMurray, Alberta, had the highest average debt levels, at $37,800, as well as the highest delinquency rate, at 1.72 per cent.

Vancouver and Toronto saw the highest rate of debt accumulation in the first quarter, with 5.2 per cent and 5 per cent growth from a year earlier Montreal is the least indebted city, with average debt loads at $17,300 Ontario and British Columbia have the lowest delinquency rates, at 0.95 per cent and 0.84 per cent. Nova Scotia, at 1.74 per cent, had the highest.

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Late payments set to rise on Canadians' $599-billion of credit card, non-mortgage debt, Equifax predicts

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Canadian delinquency rates, which have been declining since the last recession, will probably reverse and begin to climb by the end of 2018 as the central bank presses ahead with interest rate increases, according to the country's largest credit reporting firm.

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In the attached video BNN speaks to BDO Canada's Paul Ihnatiuk about effects resulting from debt and his companies role in helping solve these issues. They conversation revolves around a poll taken showing what extent Canadians would go to escape debt. For example, many said they would give up eating out for 3 years to escape their debt, and some said they would give up their rights to vote for 8 years! They go on to talk about how credit is the major cause for debt, and how a budget and proper planning, as well as being able to pay off your credit cards every month, can help people out of debt. They touch on small percent of poll-takers who voted they would move back to their parents house, regarding how that action can actually transfer debt and stress onto family members.

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The multi-generational effect debt can have on Canadian families

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While one poll shows 47 per cent of Canadians would be willing to give up their basic right to vote to erase their debts, BDO Canada's Paul Ihnatiuk talks about the importance of their other right to get advice from a licensed insolvency expert.

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In this video, Bruce Sellery was on Cityline, talking about how debt is a big issue in Canada and how we think and stress about it all the time. People try to claim that there is good debt and bad debt, while this may be somewhat true, debt is still debt which can cause a lot of stress on people. They try to justify their debt by saying they are using the money to renovate a kitchen but in reality theres no need to justify why you're going in debt. In the video it shows some tricks to help with paying your credit card. It has to be realistic in order for your family and what you are able to succeed at your goal.

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On any given day now you can expect to hear at least one economist, public official or financial commentator express grave concern about the mountain of debt Canadians now carry. The bloated debt loads of Canadian households has become a pervasive topic in media. But for all the attention the subject has received, it's a safe bet that most people still cling to very clichéd notions that only so-called "deadbeats" ever hit the debt wall. Nothing could be further from the truth. The reality is Canadians would be shocked if they could peer into the private financial lives of many of their closest neighbours and friends.

As a licensed insolvency trustee firm, our practice is on the front lines of Canada's household debt binge and the bad personal finance habits that ensnare so many people. And what we see every day is that the majority of those grappling with serious debt trouble are the most typical individuals and families you could imagine.

Here is just a sample of recent files that have crossed our desks: A staff accountant with multiple lines of credit, several maxed-out credit cards, a big mortgage, a significant home-equity line of credit (HELOC) and two leased luxury cars; a TTC driver with two mortgages and $100,000 in unsecured lines of credit; a teacher with eight payday loans and a senior financial analyst at a chartered bank with seven credit cards, all carrying high balances. I could go on and on.

Those disturbing financial cases are no longer the extreme end of the spectrum that they were at one time. They are the "new normal" in our trustee practice. The real horror stories are far worse, albeit less frequent.

The normalization of excessive debt is reflected in the data that Statistics Canada regularly releases. The household debt-to-income ratio now stands at 169.4, up 23 per cent from a decade ago, and on par with what the U.S. saw at the peak of its housing bubble. Of course, such figures are averages. According to the Bank of Canada, close to half of all high-ratio mortgages originated in Toronto were to borrowers with loan-to-income ratios in excess of 450 per cent.

A growing number of the clients we see have all the trappings of a middle class lifestyle-they're gainfully employed, own a home and from the outside seem fiscally responsible-but it's built on a foundation of debt and bad financial decisions. Many cases involve large tax arrears, such as a real estate broker who owes $383,000 to the Canada Revenue Agency in unpaid income tax. Others involve failed businesses. Then there are the frequent cases where financial companies inexplicably lend vast sums to underemployed people, even as their debt loads balloon out of control-in one case, a senior who emigrated to Canada 15 years ago, had never worked and been on a very low disability pension since shortly after arriving, owed more than $200,000 in credit card debt.

While the causes for these horror stories are varied and obviously complicated, there is almost always a common detail: Most clients in significant debt trouble today would not be in that situations had they simply funded their lives by cashflow instead of credit.

And that may be the crux: a decade of low interest rates has fuelled habitual credit reliance by consumers. Two or three decades ago, it would have been unthinkable for people to hold the equivalent of $30,000 or $40,000 (or more) in credit card debt. Yet now that has crept into the Canadian psyche as just something one does.

(By the way, have you noticed the "Estimated Time To Pay" wording on your credit card statement? It is a calculation of how long it will take to pay off your credit card balance if only the monthly minimum payments are made. The record we've seen is 330 years and 10 months. Don't forget, a credit card balance of as 'little' as $6,000 can take more than 40 years to pay off if only the minimum payments are made.)

A lot of credit card debt, of course, has in the last few years been shifted over to lower-interest lines of credit, usually unsecured. This Peter/Paul conundrum is interesting: we very often see examples where people have paid off their credit cards using available lines of credit, only to have their credit card balances swell back to where they were within a year or so.

Let me share a scenario of someone who is self employed, as it highlights how a debt problem can spiral out of control quickly. I met recently with a woman in her 50s who owns her own company that furnishes and decorates high-end businesses, like big law firms. Or at least it did. With big firms shrinking to meet reduced market demands and trimming costs, her business had dried up.

Her accountant brought her to me, and it was clear she had severely mismanaged her business and financial affairs, despite her accountant's warnings. We see this all the time-small business owners are typically very good at what they do, but very poor at handling day-to-day administration.

Here are some specifics that show how misaligned her lifestyle and business expenses were with the actual cash she was earning:

* Owns a townhouse: mortgage $600,000, estimated value $650,000

* Mortgage payments: $3,600/mo

* CRA lien against house for personal income tax owing: $98,000

* She had previously refinanced her house to help fund her business

* She had a prior bankruptcy 15 yrs ago-discharged

* Leased car: $51,000 owing

* Credit card debt: $75,000

* Business loan (personally guaranteed with a high interest rate): $45,000

* Outstanding debts to suppliers: $80,000

* Business rent owing (seven months behind): $11,000

* Net self-employment income: $3,500 per month, or $42,000 per year

The CRA lien is the big problem here. She can't sell or refinance her house with the existing lien unless she pays her back taxes, while in the meantime interest charges and penalties pile up.

Although this may seem hopeless, it is actually a straightforward personal bankruptcy scenario: She closes the business, any source deduction or HST owing is included in the personal bankruptcy filing, as are any personally guaranteed business debts. She walks away from her house and cannot be sued for any shortfall due to the creditor protection afforded by her bankruptcy. She will lose her house and business, but that almost certainly would have happened regardless.

I should point out that clients in this type of situation often insist on keeping their house, a reflection of the deep-seated Canadian devotion to home ownership, and it takes long and difficult conversations with family, friends and trusted advisors before they come around to the realization that they have to let go of their home.

Keep in mind that the above situation is very normal for us. This is something we see every week.

As stated earlier, the most troubling trend we see now is the flood of regular Canadians facing financial crisis. Households and individuals who are employed, have decent incomes, own homes and have done everything they feel they 'should' be doing now find themselves facing serious, if not insurmountable, debt problems. They are having to file insolvencies now, or will in the next few years.

There are possible alternatives to outright bankruptcy, of course. Often, if clients have serious debt problems but also decent incomes, they will attempt a consumer proposal to settle their debt legally through a licensed trustee. In effect, creditors agree to accept just a portion of what they're owed (which is more than they might get if someone is forced into a personal bankruptcy situation). This allows people to keep their assets (house, vehicles, investments, cottage, etc.) while eliminating unsecured debt they would otherwise have little chance to pay off in the normal course of life. The credit impact in a proposal is easier than a bankruptcy, and one can rebuild credit in a few short years. It's a growing option for debtors. In fact, about 50,000 Canadians file proposals every year, and that number is rising.

Increasingly, life has simply become too unaffordable for many. The temptation to spend is too great, and access to cheap debt too easy. When the gap between what people need or want, and what they can afford with their incomes becomes too great, credit is used to fill the gap. Interest kicks in, and the cycle begins. As credit card debt is shifted to readily available lines of credit, $5,000 becomes $15,000, and soon you're facing a $50,000 or $100,000 debt problem. A person living at or below the median income range simply cannot handle this.

Unfortunately, that's a lot more 'normal' than you think.

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Debt horror stories are 'the new normal' in Canada - MoneySense

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On any given day now you can expect to hear at least one economist, public official or financial commentator express grave concern about the mountain of debt Canadians now carry. The bloated debt loads of Canadian households has become a pervasive topic in media.

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This video explains some ways bad credit can affect your family. The short video explains how your personal credit score is yours, and yours only. It doesn't translate onto your family members. Although it doesn't directly affect your family, bad credit score does in fact have an affect on your families way of life. Bad credit score can affect your families ability to purchase a new and reliable vehicle or even a home! Bad credit can even make it very difficult to take out a student loan to send your child to school. This video helps outline the negative affects of bad credit, and helps motivate us to keep a good and clean credit score for our families sake.

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Does Having Bad Credit Affect Your Family? - Credit in 60 Seconds

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In this article it explains how much trouble Canadians are in due to credit card debt. Alberta and Saskatchewan are some of the more vulnerable Provinces in Canada due to the oil mines. From 2014-2016 unemployment claims doubled due to a prolonged sector after the global price of crude decreased in 2014. The reason debt is so high right now is due to the "attractiveness" of low interest rates which makes people want to spend money thinking if they do not pay it off it wont cause too much of an effect on their lives. This is false because interest rates may be low, but the interest of what you spend can increase rapidly. It is more common for people to pay their mortgage instead of their credit card debt because it is flexible where as paying your mortgage is not.

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TORONTO - Unprecedented household debt levels will give Canadians a rude awakening on their unpaid credit card bills if another economic downturn materializes in the coming years, according to a new report issued Wednesday.

Moody's Investors Service it will be closely watching Alberta and Saskatchewan for signs of increased delinquencies on consumer debt portfolios.

The two provinces already saw a doubling of initial unemployment claims in the latter half of 2016, a result of a prolonged downturn in the oil sector after the global price of crude began to plummet in late 2014.

"We wouldn't be surprised to see that as an area of strain in the country," said Jason Mercer, an assistant vice-president at the ratings agency.

Moody's said card loan performance in these Prairie provinces in coming quarters will be "an illustrative first test" of the ongoing strength of the banks' Canadian credit card portfolios and the broader environment for consumer credit.

"We're all a little vulnerable right now, here in Canada," Mercer said.

"If there's a shock in employment, somehow, that could cause consumers to change their spending and their debt service patterns."
More about household debt in Canada:
Canadians have seen their dollar-to-debtload nearly double over the past 30 years, as lower interest rates and relatively small economic stresses encouraged more people to spend against things like rising house prices, Mercer said.

Moody's says consumers owed $1.69 of debt for each dollar of their disposable income as of March 31.

The meteoric rise of debt has been fuelled partly by attractively low interest rates and a Canadian economy that generally recovered more quickly from the last recession than the United States and Europe. Some analysts have raised concerns that an entire generation was growing comfortable with an unsustainable level of debt.

Moody's says mortgage debt growth, not credit cards, is driving the increase in Canadian household debt.

Consumers typically pay more attention to meeting their mortgage payments over credit card debt, Moody's said, because the flexible payment terms of cards don't lead to losing assets like a home or automobile. However, credit card interest rates tend to be much higher than those associated with mortgages.
Also on HuffPost:

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Canadians' Credit Card Debt Could Be Trouble In Next Recession

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TORONTO - Unprecedented household debt levels will give Canadians a rude awakening on their unpaid credit card bills if another economic downturn materializes in the coming years, according to a new report issued Wednesday. Moody's Investors Service it will be closely watching Alberta and Saskatchewan for signs of increased delinquencies on consumer debt portfolios.

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Money Matters Assignment 2 Reflective Questions