Sunday, December 19, 2010 | Categories: Episodes
On Cross Country Checkup: household debt
Deep into spending season along comes the fun killer: the news that Canadians are now deeper in debt than even the Americans.
Economists say it's a dangerous situation ...for both individuals and the country.
What do you think? Are you spending too much?
With guest host David Gray.
It's the weekend before Christmas, and across the country shoppers are on the move, filling lists, making spontaneous purchases, and reaching high on shelves for treasures that even hours ago they would never have considered wanting to buy.
And all the time, in the back of their minds or scrawled on paper scraps or punched into smart phone apps, they are making calculations. Money in, money out. How much room is on this credit card? Can I put this present on debit? Can I do it if I don't have to pay till spring?
There is a difference between fulfilling expectations and managing them, and if recent accounts are to be believed, Canadians are denying themselves little these days.
Today we're talking about household debt.
We learned this past week, courtesy of Statistics Canada, that Canadians have surpassed Americans in the levels of household debt they're carrying.
How did we get here?
Well during the recession when factories started closing and credit tightened up south of the border ...the banks at the urging of the government dropped interest rates to grease the wheels of the economy. Canada followed suit ...even though our economy wasn't as badly affected. So, while Americans tightened their belts, Canadians looked at the near zero interest rates ...and went shopping ...big time.
That's at least part of the answer. The other is wrapped in our own changing views of acceptable risk. For some, an increased comfort level with debt. For others, a realization that digging a deeper hole was the only way to keep up. And if everyone's doing it, could it be wrong?
Is this a good thing? ...spending may have kept us from the worst of the recession.
Keeping in mind that the bills - as always - will come due ...and if interest rates should rise, there'll be much, much more to pay.
Economists say our levels of household debt are bordering on dangerous. We'll talk with one in a few minutes. One estimate is that one in ten Canadians would be in serious trouble if rates started to creep up.
We want to know if you think you've been spending too much ...or borrowing too much? And why? Because you can? Because the low rates mean you don't have to put off buying that wide screen TV you always wanted? Or is it because some things ...some basic things ...just cost more nowadays ...things like houses and education for the kids.
And as for the kids, what are you teaching them? And what did you learn from your parents?
And finally... given that over the past 25 years, middle-class incomes have barely grown if at all. Are we past the point where the so-called middle-class have to start trimming expectations?
Our topic today: "Is household spending out of control in Canada? Are you carrying too much debt?"
I'm David Gray ...on CBC Radio One ...and on Sirius satellite radio channel 137 ...this is Cross Country Checkup.
I understand that Cross Country Checkup is talking about Canadians and debt on today's show. Assuming Canadians are taking on too much debt/credit, I feel that financial institutions are taking advantage of the situation.
There's one trend that I haven't heard covered in recent news items on credit cards: the continued upward creep on credit card interest rates. This is happening both at the low end (low interest rate credit cards used to be around 9.95% and have now crept up over the last few years to about 11.99%) and at the high end (charter bank premium Visas and MasterCards used to top out at about 18.95% and are now up to 19.99% with some creeping over 20%). For example, even over the past year, friends and family have seen the following:
ScotiaBank increased its low-rate Value Visa from 10.4% to 11.49%.
American Express increased rates on personal credit cards from 18.99% to 19.99% (and higher if you miss payments).
National Bank increased its low-rate MasterCard from 11.5% to 14.5%.
CitiBank increased its platinum MasterCard from 16.9% to 19.99% for purchases and to 22.99% for convenience cheques. Some customers saw rates go up to 23.99% for the same type of card.
RBC increased its low-rate Visa from 11.9% to 11.99%.
And the most recent increase came from CIBC. Last month, CIBC announced that in February, 2011, their low-rate Select Visa will increase from 11.5% to 11.99%, and their US Dollar Visa and Aerogold Visa will go from 19.5% to 19.99% for purchases and from 19.5% to 21.5% for convenience cheques.
I called CIBC customer service and spoke to a supervisor about why CIBC raised their rate to 21.5% for convenience cheques. I was told that the increase to 21.5% for convenience cheques was done to "discourage people from using their Visa for cash advances." This reason doesn't make sense because earlier this fall CIBC mailed out special low interest rate (3.9% for 6 months) convenience cheques for our Aerogold Visa's to encourage us to transfer balances to these cards. Now they're going to increase the regular rates on these balances after the promotional period is over.
I have to wonder whether Canadian banks and financial institutions are taking advantage of consumers during a slow economy by slowly and steadily increasing credit card interest rates to increase profits. Whenever I call to ask why rates are being increased, I never get a satisfactory answer. One concrete step I've e-mailed the federal finance minister about is to enact legislation that grandfathers existing credit card balances at the old interest rate whenever companies increase interest rates. I understand that the United States has recently done this.
Thanks for your "interest."
Loved the topic for today, great opening, but now you've got a bank person on talking about the problem like a banker. Sorry, I'm turning it off. When the CBC can find not only a more interesting and ultimately a more objective guest, someone committed to the public interest when it comes to Canadian economics, you'll have my full attention.
I think it's a scandal that bank economists are called repeatedly by the media (CBC included) to talk about economics as if these folks, and the corporations they work for, have no self interest in profit before people. I thought the CBC (a public broadcaster) would have a better approach to such an important public interest issue.
Maybe next time for both of us.
Yes, we are in debt, but do you ever stop to think that maybe it is not frivolous spending, but that the average lower income citizen can not afford to live and then dips into credit? When you have no food in the fridge but you have a bit of room on the Visa, what would you do? Minimum wage is eight dollard an hour. That means if you work full time you make $1,280 a month. You try living on that! rent goes up the wage doesn't. Food goes up, the wage doesn't. Of course people can't save. Of course people end up dipping into the credit.
They say get a better job, but who can afford to go to school? There just seems like there is no way out of this hole. You might think that I am off topic, but I am telling you that consumer debt and the working class getting paid peanuts are directly related.
Comox, British Columbia
I'm a soon-to-be 43 year old single dad with a 6 year old daughter, and I have exactly zero debt. I have no credit cards, and use only cash to purchase the things and pay the bills I need, as my father taught me. I am also teaching my daughter the same thing.
She asked me what credit cards were, and I explained that they let you get what you want now, but you have to pay more later. Her response was, "That's dumb!" After seeing a commercial for Capital One Credit cards, where the tag line is, "What's in your wallet?" She responded to the television, "Money, what's in yours."
We have a large pile of presents under the tree, all paid for, and more than a few hand made. My daughter knows that Christmas is about family and togetherness, not who has the biggest credit card bill in January.
Love the show and the topic. Best Regards,
There is something fundamentally wrong with worrying about the ratio of debt to income. How can you say that my debt should be less than 1.5 times my annual income without looking at my total financial situation, ie net worth?
Let's say my income is under $50,000 per year and my debt is $300,000. According to your formula, I'm in bad shape. But hold it, my net worth is close to a million dollars. I have no worry at all about that $300,000 because it is more than covered by other assets. And when interest rates start to rise such that the carrying charges get concerning, I'll simply liquidate an asset.
Wouldn't a ratio of debt to net worth be a better indicator?
While personal debt is a cause for concern, I am also concerned about the degree of investment by our banks in the United States. During a recent trip to New York, I saw more TD Banks than I see in downtown Vancouver. I understand that BMO and RBC are also opening many branches in the States. Are these banks subject to the same regulations when opening branches in the U.S. as they are in Canada? If not, and if they are operating under American regulations, does this present any future risk?
Vancouver, British Columbia
We used to be debt free before we returned home to Canada. But since our return we have had to go further and further into debt because of the high cost of education for living. Paying university fees, university residence and high taxes coupled with unemployment. It is easy to say we should put money aside for retirement and not spend excessively. When one is not spending excessively, not smoking, drinking, partying, eating out, going to the movies etc. there is little room to cut back. None of your experts ever look at this aspect and have solutions that are practical.
Vancouver, British Columbia
People think they need larger homes because they need somewhere to put their stuff. So the first clue is a smaller place and thus no place to accumulate stuff. Second is to really look at the consequences of bigger space - more to take care of, furnish, etc. The other drawback for a family is that people then spend their time away from each other, in their separate rooms with their gadgets. Resist buying the bigger home and spend time doing things together!
A credit card can be a good monitor on spending and also give us rewards. I trained myself, when I first started using my credit cards, to pay off the card purchase the day or at least the week that I spent on the card. Made me very aware of what I was spending, did not exceed my bank account and avoided interest charges. I use credit cards as a tool rather than a cash cow that I would pay more for later.
The emphasis is on buying "things". None of us need more things. In contrast to the quick buy of things, I would encourage them to look at carefully purchasing services instead, like home cleaning, health promoting activities and services, artists, paying sufficient rathes, rather than the minimum, for child care, etc. We need to turn from a thing-oriented consumer society to a service-oriented society. Keep our economy going by paying people for doing what they love that benefits us instead of buying stuff we don't need. We are very stingy in paying people for their activities that benefit us in many ways but will easily spend on a thing, hence the change to calling bank services "products". Then people will buy.
Dr. Patricia J. Wales
My experience has been that my salary has had only miniscule increments over the past few years. That's fairly typical of those of us working in the public sector. Yet, every fixed expense has increased annually - from taxes to fees to service charges to insurance premiums. Additionally, even with a professional income, there is the extra challenge of living alone, where I must cover all costs by myself. Being single in Vancouver is not always easy.
Vancouver, British Columbia
One of your commentators suggested that the great driver of household debt is impatience. Young people who can't wait for their incomes to match their aspirations buy houses in Rosedale and put BMWs in the driveway. I don't doubt that that happens, but it certainly doesn't explain the mass phenomenon of household debt. After all, what proportion of Canadians live in Rosedale, or anywhere like it?
I think there's a much bigger mass of people whose bahaviour accounts for what we're seeing here. These may be people whose income has dropped in the last few years, and who happen to have credit cards. (Actually, ordinary life in Canada is almost impossible without a credit card.) Or they may simply be people whose obligations have increased, and their income hasn't. They pay the rent or the mortgage--which they can't control--and then wind up putting the groceries on MasterCard.
And it isn't just rent or mortgage payments. There are so many industries today whose business model involves locking consumers into monthly payments. These industries aren't always entirely honest, either, about what the monthly payments are going to be. Cellular service and cable are typical, not to mention utilities. All Ontarians, for example, are really behind the eight ball when they use electricity.
When you lose your Nortel or GM type job and have to meet your obligations with a Starbucks type job, your credit-to-income ratio is likely to take a hit.
It's unrealistic to blame this situation on rampant consumerism. This is simply a symptom of a collapsing economy, and there's not a lot that the consumer can do about it. Except, perhaps, as a voter.
This is just a note to say that the money you have, or don't have, can seem quite ephemeral. A number of years ago I bought a financial program (Quicken). I found that seeing my account balances day-to-day made everything seem much more real. It gave me the ability to predict where I would have issues and when I could spend.
Victoria, British Columbia
I'm the media relations officer for the Financial Consumer Agency of Canada. This independent federal government agency has lots of information to help Canadian consumers learn more about financial
products and services. We have tip sheets to help consumers beat their debt, budget and use their credit card wisely. This is free and available online at fcac.gc.ca. Our interactive online selector tools can help them find credit cards with lower interest rates or no annual fee, no-fee or low cost bank accounts, and see how long it will take to pay off their credit card balance if they pay only the minimum monthly payment.
We also have an online financial literacy resource called The City that is a great way for students to learn more about the difference between their wants and needs, budgeting, managing money, keeping expenses in line, building savings, using credit wisely and the basics of insurance and investments. They also learn how to avoid getting into debt and becoming a victim of fraud. If the students learn from mistakes made in the virtual world, they can avoid making what could be a costly mistake in the real world.
I think the righteousness of the near retirement baby boomers regarding household debt is a little rich. This is coming from the generation who has a sense of entitlement like no other and who thinks that retiring at 55 with a pension and a public health care system to help them live for another 40 years is a right. What they really left behind is a self indulgent consumer culture, massive government deficits and ballooning debts which allowed them the lifestyle they have become accustomed to. In the 70's you could get a good government job with a Grade 10 education. Now that same job requires, at a minimum, a $40,000 bachelor degree. The boomers should get off the soapbox.
Enjoying the show.
I think a major difference between the thinking of 20 or 30 years ago and the present is that debt has been normalized and has become a way of life. Thirty years ago, being in debt was undesirable, a bit shameful, something you avoided. Today, it's so common that there isn't any stigma attached to being in debt. Our society even encourages it. Debt by way of excess consumerism is way out of control.
While I agree that Canadians today are worried about debt and should be, I am quite annoyed listening to the sanctimonious people talking about the differences between the generations.
In order to raise a family in a major Canadian city, the price of admission into the housing market is $500,000 and that is for a dump. The average Canadian income for a family (two incomes) is approximately $69,000. Younger people invest in education, particularly during a recession. You can divide debt into good debt and bad debt, they both still feel pretty bad.
If you have two kids, you cannot walk out of Shoppers Drug Mart for less than $80 (diapers, etc.). Daycare for two kids is $2510 a month.
People can also talk about shopping at Walmart, Zellers, etc. in order to save money. Well, then you are
actually part of the problem. You are killing manufacturing in your own country.
We are a greedy society, for sure. However, the greatest greed is at the top - banks, the auto, gas and insurance industries. We bailed all of them out. We never bailed out schools, hospitals or seniors homes.
What people need are decent jobs so that the middle class does not erode. We need to grow as a country. We need to innovate and invest in ideas. Savings accounts are great, but we need to pull together and rebuild our country.
I missed about 15 minutes during the middle of this broadcast, but from what I heard I felt like the impact of student loan debt was really under represented. Speaking as a student at the University of Saskatchewan, I was always hesitant to take out student loans and actually managed to pay for my first two years of college in my hometown (Medicine Hat) out of my own pocket. However, had it not been for my parents allowing me to live at home during this time, this would have proven to be impossible. I have many friends who weren't so fortunate, for whatever reason, and have accrued significant debt because of it.
The comments of "Barry", specifically, bothered me because he seems to be putting today's youth on an even playing field with those of his own generation. In my opinion, its next to impossible for a person today to make enough money to raise a family, own their own home, etc., and a university education isn't cheap.
Very interesting that the word "conservative" was used in conjunction with fiscal responsibility. You must separate the meaning of the word conservative from the Conservative party. As I understand, finance minister Jim Flaherty managed to leave a deficit for the Ontario government when he left, Mulroney left a huge deficit for the incoming Liberal government and everyone should be aware of the fact that the Liberal party left a large surplus for this "Conservative" government and they have managed to parlay the suplus into the largest deficit ever.
As parents model for and teach children, so governments model for and teach their citizens. Perhaps we need to take a good look at this Conservative government (not to be confused with fiscal responsibilty) to see why some of this exhorbitant personal debt has accrued.
I agree with those who hold that education is the key to this problem. It makes sense to offer this information in the schools, but as we all know information is best learned when it is personally relevant.
I cheered to hear Gail Vaz-Oxlade talk about the banks' responsibility to assess creditors' ability to carry debt. I think, further, that the banks must take responsibility to educate applicants about basic financial literacy, so that neither the banks nor the customers were taking unwarrantable risks. I also think that our young people are getting a really bad message from the government, form the banks, from the educational institutions about credit. We must rethink and restructure our policies and pracitces regarding financing post secondary education.
Our student loan system was designed at a time when a diploma or a degree guaranteed a good income soon after graduation. This is no longer the case in many fields. Education is not a want but a need, for society as well as for individuals. When our youth is required to mortgage their future for present education, we are all taking an unwarrantable risk.
Fort McMurray, Alberta
Aren't our CBC hosts supposed to be informed by producers on air when guests say outlandish things? One of your callers today said the last low-interest rate period he remembers was the 1980s. Interest rates in the 1980s were the highest ever, with mortgage rates ranging from about 11 percent in 1979, rising through the roof at 22 or 23% during the early 1980s, and finally coming to a "low" of around 12.5 percent in the late 1980s, give or take a little. A return to the "low rates" of the 1980s would bankrupt the entire country! Canada's economy is being undermined by the wrecking of manufacturing in our country. No production, no consumption, no social programs. If we build manufacturing, provide good paying union jobs providing a Canadian standard of living, increase investments in social programs then we wouldn't have to go into debt, personally or collectively through government borrowing. Let's stick to facts.
Happy holidays fellow Canadians.
Vancouver, British Columbia
I am always amazed when I am in line at a shops check-out point and the person say ahead of me is asked if he wants a receipt for his purchase and the reply given is "No, I don't want it."
How does he know what he just spent on that item or items? Does he or she not need a receipt so as to be able to evaluate at the end of each month just exactly what he has spent his money on?
Taking a regular assessment monthly, writing down just how the monies have been spent on different items with the aid of their receipts for purchases, surely then enables him or her to know exactly where his or her money has gone during that month and it becomes a kind of learning tool to change spending habits if necessary. Most people would be horrified to see how their monies are regularly being frittered away if these receipt saving habits were adopted more often.
Alert Bay, British Columbia