March 6, 2013

Are you suffering from debt creep? Never heard of it?

Most people have heard of bracket creep, an economic term that refers to a situation where inflation pushes income into higher tax brackets. The result is an increase in income taxes but no increase in real purchasing power.

A similar principle applies to debt creep, (a term I use) that refers to how debt keeps going up once you start using it.

Inflation and taxation are key components to how people become dependent upon credit cards and lines of credit.

One example of debt creep is the inexorable rise of consumer debt each and every year since 1975 as the following historical chart illustrates.

Consumer Credit (excluding Mortgages) Statistics as reported by the Bank of Canada

1975    

$23-billion

1985   

$58-billion

1990           

$98-billion

1995           

$116-billion

2000           

$187-billion

2013           

$513-billion

(Source: The Bank of Canada)

Even with the recent mass media coverage of household debt in Canada and an urgent plea for people to get control of their finances, the debt figures keep going up, up up. Since January 2012, the consumer debt totals have gone up $13 billion.

How does this unstoppable race for some kind of debt ceiling get explained?

Most of the time, the finger is pointed at overzealous shoppers. They are gently scolded for spending too much. But, the shoppers are also applauded because the economy needs them to grow. We receive a mixed bag of messages.  Household debt is too high but please don’t stop shopping. Somehow, find a way to pay down the debt.

That said, the historical tension between income and the cost of living remains anonymous and unspoken. The very real problem middle and lower income families of all ages have in meeting all of the necessary monthly expenses gets sidelined.

Debt creeps into our lives as we struggle to make ends meet. Once there, unfortunately, the lines of credit have a tendency to rise to their limits and remain there – forever, or until the house is sold or remortgaged – or a crisis develops that requires drastic action.

Credit card balances also creep onto the family ledger by rescuing people from their income shortages and inability to respond to emergencies with savings.

A good friend, a senior on a limited income, began the Christmas season with a zero balance on his credit cards. Seasonal pressures resulted in dipping into the red ink a bit but nothing big. Less than $500. Before the New Year clock struck 12 he confronted an unexpected car repair that cost another $500. and a tax notice of $600. for a reassessment because of an RRSP he cashed in 2011 that he forgot about.

These additional expenses pushed him up to $1,600.  Since then, the balance has been creeping up and now sits at $2,000. He is worried because he doesn’t know how he can pay this debt down, and his toes have begun to pop through his socks. His microwave oven shut down in December. The dishwasher gets stuck mid cycle. It’s uncanny how a person’s financial well-being can fall apart so quickly.

Perhaps even worse, once your will is broken – your resolve to pay the debt off every 30 days, your defences go down. You begin to accept the debt, pay the high rate of interest and jump from a balanced budget onto on a lifeboat of debt.

This may sound like a small amount – going from zero to $2,000 in 60 days. It does however; illustrate a quite different financial profile to profligate shoppers recklessly driving the economy to a debt ceiling. 

We need to be more sensitive to the silent majority who struggle with the costs of raising children, young people with post education expenses, seniors who are the least equipped to deal with inflation and increasing taxes, bridge tolls, rising public transit costs and the very real issue of poverty in Canada. The ever increasing debt levels tell an understated story of struggle.