Opinion

There is no reason to panic, yet — but it is time for Canadians to exercise greater care in their spending and borrowing decisions.

That’s one of the key takeaways from the Bank of Canada’s financial system review for 2023, which was released yesterday. In that report, which is released annually, the bank identifies its key sources of concern for the financial system in Canada and explains how they have evolved over the past year.

Among the many areas covered in the lengthy document, a few stand out. First, there is the bank’s concern that global economic pressures “have exposed vulnerabilities — notably, business models that rely excessively on an environment of low interest rates and low volatility — and serve as a reminder that risks can emerge and spread quickly.”

The report also states, “In light of higher borrowing costs, the Bank of Canada is more concerned than it was last year about the ability of households to service their debt. More households are expected to face financial pressure in the coming years as their mortgages are renewed.

“The decline in house prices has also reduced homeowner equity, and some signs of financial stress — particularly among recent homebuyers — are beginning to appear.”

Later in the report, the bank expands on that issue: “Elevated interest rates and declining house prices have reduced the financial flexibility of many households … High debt-servicing costs and low homeowner equity make households more vulnerable to default if they experience a drop in income. A severe recession with significant unemployment could lead to more defaults.

“Indicators of financial stress among households remain low but are rising … Over the past year, homebuyers have increased their reliance on credit card debt. A larger proportion of them are carrying an outstanding balance and a higher average amount is being carried over. Both metrics now exceed their pre-pandemic peaks … Arrears on credit cards have also been rising.”

None of those statements should come as a surprise. As interest rates have increased, so have mortgage payments and the cost of many of the goods and services we rely on. Life has become more expensive, and many of us are now relying on credit cards, and growing credit card balances, to pay for those goods and services.

That may cover costs for a few months, but it’s not sustainable. The credit card balance can’t keep increasing, month after month. You eventually hit your credit limit, the inability to make even the minimum monthly payment, or both. Then what?

As a growing number of Canadians are learning, it’s a bad situation to be in. Not only is it bad for your finances; it’s bad for relationships and all that debt stress is bad for your health.

For those of us who are feeling the squeeze caused by higher prices, and are tempted to resort to credit cards and other forms of easy credit to bridge the gap, the Bank of Canada’s message is clear: be very careful in your spending decisions.

As the bank warns, “risks can emerge and spread quickly.” Interest rates may still go higher, resulting in higher mortgage payments, lower home prices and reduced equity in your home. Higher rates could make goods and services even more expensive.

For those who have been relying on credits cards to make ends meet, and feel overwhelmed by debt, do not despair. The situation is not hopeless. There is a way out, and that starts with seeking the help of a credit counselling service via your financial institution, an accountant, the Yellow Pages or even a Google search. They are trained to help people who find themselves in the debt deep end. They can help you through this.