2025 Canadian Debt Update

Economic indicators reveal that consumers are navigating the challenges caused by the highest interest rates since 2001. Credit card balances hit a new milestone of $124 billion, and delinquency rates rise even as average monthly card spending declines. Millennials and Gen Z consumers were at the forefront of this increase, holding $1.1 trillion in outstanding balances, a 10% year-over-year rise. Gen Z consumers were the fastest-growing segment, with a 29% increase in credit participation as they diversified their debt beyond credit card debt.¹

The paradox of credit card debt and borrowing is that while interest rates move lower, lessening the interest payments on debt, those lower rates motivate people to assume much more debt.

“Curious how often you Humans manage to obtain that which you do not want” (Errand of Mercy,” Star trek, Spock, Season 1, Episode 26)

Debtors become servants to the lenders.

Debt can be unquantifiable when present in the financial planning model because we do not know when interest rates will rise.

Manageably low interest rates have allowed many to add to their debt load, including mortgages, non-mortgage loans and consumer credit. However, people are increasingly more aware of their mounting debt even as they consider interest rates slowly decreasing.

How can we quantify debt management?

Household debt is only quantifiable if we aim to deal with it by calculating it into our financial needs analysis (FNA), which presents well-planned investment scenarios with debt liabilities mathematically weighed against potential positive future gain.

Debt is typically revealed as liabilities in the net worth statement, whereas, in the complete FNA, factoring in your retirement needs careful, systematic analysis, which we can offer. The FNA will present your foreseeable future cash flow from capital investments and pensions, only after being reduced by debt liabilities, which is your realizable retirement income.

History lesson: the financial risk associated with debt

Risky lending by banks led to the 2008-9 credit crisis of “subprime” mortgage loans—loans to people at a high risk of defaulting—aptly termed “unqualified NINJA loans”—no income, no job, no asset. Low interest attracted borrowers who were not asked to undergo credit checks or put much, if any, down payment on a home before the loan was approved. As many as 40 percent of the $3 trillion lent in mortgage loans made in the United States in 2006 were suspected to be subprime (or high risk).

We have witnessed the critical need for a balance between consumption and savings, and this relates to the financial needs analysis of a retiree’s income sustainability.

Shift from borrowing to investing to enhance your retirement.

A person who borrows money to dine out often or buy shiny new things (a new cell phone, gadgets, an expensive car, etc.) increases his present consumption at the expense of his future consumption, which includes reducing his financial provision of income during pending retirement. Why? Because debts plus interest eventually have to be repaid, subtracting from our retirement income!

By conservatively placing some of his money in a money market fund or GIC, a consumer who lends reduces his or her present consumption to increase his or her future consumption.

Conservative, frugal consumers aim to maximize and build retirement investments in RRSPs and TFSAs. When a person’s wealth increases through disciplined investing, he can use it to consume enough for a decent lifestyle while investing more to sustain a better future income and lifestyle.

Advisors are trained to help you create a solid financial plan, including reducing your debt while investing for retirement. Both sides of the planning equation are essential because they are connected to the end mathematical result. Debt can decrease your net worth and your future retirement income.

^{1 TransUnion Canada.}