Where is all of this debt coming from? Well, its not just your traditional mortgage debt – it is credit card debt, consumer credit debt, vehicle loans, and home equity lines of credit (HELOC’s).
The potentially damaging factor in rising home equity lines of credit balances is two fold. With a HELOC, it is possible for borrowers to only pay interest, so overall indebtedness can increase while your principal amount owning stays the same. This can also have negative consequences on borrowers credit ratings as many scoring agencies use this data to report credit scores.
Perhaps more alarmingly, a recent report states that Canadian HELOC’s are on average about 4 times the size amount of HELOC’s than the US. This research was based on DBRS and Federal Reserve Data. Many borrowers were too young to remember the financial crisis of 2007-08, however ballooning consumer credit debt and reckless credit practices played a large role in the eventual collapse of the US financial system.
A consumer report in February said if housing prices fall, could be possible for indebtedness lead to entire financial system vulnerability. In essence, household debt in Canada could have a crippling ripple effect through the entire Canadian economy.
What does that tell us? As Saskatoon financial planners, we do our very best to consult with our clients about cash flow management. It is not enough just to have a focus on retirement when managing day-to-day cash flow can be one of the biggest hindrances on an overall financial plan. It is possible to use credit wisely and even leverage it for investment purposes, but one should do so with caution and rely on the services of professional for guidance. If you feel as though you are caught in an unmanageable credit problem, seek help from a professional.