Why Canadians Fail to Reduce Credit Card Debt

by John_S on January 7, 2012

During the last year alone, 25 percent of Canadians have accumulated even more debt, according to a study released last week. At the same time, a consumer debt survey by Manulife Bank of Canada shows that three-quarters of consumers in the country consider it a priority to get rid of debt.

Obviously, Canadians do not use the right strategies to reduce credit card debt. The survey by Manulife shows that the majority of Canadians were not making use of the tools available to tackle debt. For example, four in ten respondents did not plan to consolidate credit card debt, which often results in a lower interest rate. This is especially true if debts are consolidated into a credit line. Credit cards, as we know, carry a high interest rate of about 20 percent, while lines of credit are offered with a 5 – 7 percent interest rate. Moreover, it seems that Canadians fail to deal with other types of debt as well. For instance, 70 percent of consumers with a mortgage loan did not make a mortgage prepayment over the last year. 65 percent did not compare financial products across lenders as to find a good deal when renewing their mortgage. According to the Manulife survey, just 56 percent of respondents expect to develop or have a debt reduction plan (The Wall Street Journal)

There are other reasons why Canadians fail to tackle credit card debt. According to TD Canada Trust, many people have a couple of credit cards, including major credit cards, gas credit cards, and retail store credit cards. Considering that the major credit cards enjoy wide acceptance, it makes little sense to use several types of credit cards. Rather than that, it is wise to hold one low interest credit card and not pay high interest on gas and retail cards. Debt consolidation is again suggested as a good solution, especially for persons who have a heavy debt load or several creditors to deal with. This is a way to save on interest costs and lower overall payments (TD Canada Trust). Other debt reduction strategies include selling one’s house and buying a less expensive apartment or car. Borrowers can sell a car and look for a used or less expensive vehicle, for example. These are ways to free up money if debt is excessive (The Globe and Mail).

Banks and other financial institutions can help their customers deal with debt as well. They monitor borrowing as to ensure that debt loads are manageable. Moreover, banks recognize the fact that borrowers have different borrowing needs, and the debt amount they are comfortable with varies. Thus, financial institutions can offer sound financial advice that is tailored to the needs of individual customers. It should be mentioned that financial institutions do not want to see clients having financial problems. Debtors are encouraged to inform their bank as soon as they find out that debt has become unmanageable. Financial institutions are the ones to help debtors deal with financial problems by offering debt counseling, advice, and alternative loan arrangements (Canadian Bankers Association).

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