Financial decisions made on a daily basis impact the lives of millions of Canadians. And while it would be nice for everyone to know the right answers when addressing personal debt and finance, this isn’t always the case.
People don’t know what they don’t know
A study of 1655 credit-constrained Canadians was recently conducted by Loans Canada and revealed that close to 70 per cent of those surveyed claimed to be financially knowledgeable, however, when questioned about their financial habits, their performance told a much different story.
Fifty per cent of respondents indicated they felt confident about their financial literacy, though are not tracking their expenses or spending habits nor paying their credit card bills in full every month.
And the most surprising Loans Canada finding? People who claim to be financially knowledgeable typically have more debt than people who claim their financial literacy is lacking. You can read all of LoansCanada.ca’s findings HERE.
Why are Canadians in Debt?
Spending money doesn’t require a lot of skill – it’s easy. Studies reveal the average Canadian consumer has $8,500 in consumer debt, which doesn’t include their mortgage. Approximately 12 per cent have consumer debt climbing over $25,000.
Debt can be built quickly through bad spending habits, not tracking expenses or neglecting to pay credit card bills in full each month – and the larger the debt, the more difficult it can become to pay off.
Canadians who lack basic financial literacy and management skills often find themselves in debt, making it challenging for credit-constrained Canadians to climb out of a personal financial crisis. In fact, almost half of credit-constrained Canadians have taken out multiple loans, with 44 per cent doing so just to make ends meet.
The devastating effects of financial illiteracy and the consequences of debt
Vancouver residents who aren’t financially savvy may experience overwhelming consequences such as unmanageable debt levels, poor credit ratings and derailed savings plans which in turn creates barriers to make ends meet.
How can Canadians get a better grasp of debt problems?
Track all debts: Making note of debts will give a clear picture of what’s owed. This assessment will help form the best strategy to reduce or eliminate debt.
Maintain a monthly budget: Creating a realistic monthly budget, which includes car and mortgage payments, variable costs and debt repayment is an important step towards debt reduction. Get creative, determine needs from wants, and find new ways to reduce spending.
Pay on time, pay in full (if possible): When it comes to credit card interest rates, many of the Loans Canada survey participants believe that making the minimum credit card payment saves them from being charged interest. It doesn’t. Pay on time and in full to avoid interest payments and potential credit score damage.
Lower the cost of debt: Credit-constrained Canadians can save on larger interest payments by first paying down debt carrying the highest interest rate. Refinancing or consolidating high-cost loans may lead to a lower payment.
Financial well-being is achieved by improving financial literacy. Loans Canada’s research shows that being confident about financial knowledge does not protect from the pitfalls of bad financial behaviours.
“There are a lot of free financial literacy resources available to residents, both from the government and private institutions,” explains Loans Canada Chief Technology Officer, Cris Ravazzano. “For example, Canada.ca has a whole section dedicated to money and finances with great information that all Canadians can benefit from. And at Loans Canada we’re always creating educational content about credit building and debt saving strategies. I think more effort is required to increase awareness about these types of resources.”
Gaining and maintaining financial literacy is the foundation of good financial outcomes and greater financial health as a whole.