The average Canadian who declares bankruptcy is a married man, 41 years of age, who owes $59,800 on average, and has four credit cards, shows a report by bankruptcy trustee Hoyes Michalos & Associates. This is the portrait of a bankrupt Canadian, but what factors contribute to accumulating excessive debt?
Reduced income and job loss obviously increase the risk of insolvency. Debt is not a problem per se for many people. The inability to repay debt is the real problem, which is the case when income drops. At the same time, credit card debt makes the largest category of debt. To this, the average Canadian who files a consumer proposal or declares bankruptcy has four or more credit cards and owes $24,390 on them, explains Hoys from Hoyes Michalos & Associates.
Moreover, it is easy to see why Canadians find it hard to service credit card debt. Interest rates on department store credit cards are as high as 25 percent, and the major credit cards come with interest rates of 19 to 20 percent. Moreover, credit cards offer a quick and easy access to money. Persons who are unable to repay other types of debt or lose their job can use a credit card to charge purchases or get a cash advance. It is only natural to use a credit card as a survival strategy, especially in the face of an external shock such as a marriage break up or medical problem (Credit Cards).
According to the report ‘Joe Debtor: the Face of Bankruptcy’, 94 percent of insolvent persons have credit card debt, carrying three all-purpose credit cards (American Express, Visa, MasterCard). 84 percent of debtors have a credit card from a Canadian financial institution, with a balance per card at $7,917 on average. Then, 73 percent of debtors carry a credit card from a non-Canadian financial institution, including MBNA, Capital One, and American Express. The balance per credit card is $5,732 on average. Compared to credit card debt ($24,390), the average Canadian owes $13,761 in bank loans, which is two times less.
Notably, female bankrupts have a slightly higher credit card debt compared to male debtors. In addition, more and more older Canadians (aged 55 and older) carry debt when entering retirement. Some debts are house-related, but an increasing number of older Canadians carry significant credit card debt. Combined with a reduction of income, due to an unexpected expense, illness, or retirement, high level of debt, and credit card debt in particular, is a major reason to file for bankruptcy (Face of Bankruptcy).
Knowing that credit card debt is a major contributor to bankruptcy, what can be done to avoid insolvency? To begin with, high-fee and high-interest credit cards can be dangerous in that they contribute to debtors’ inability to service debt. Credit cards, high-interest or low-interest, are only part of the problem, however. When spending habits and poor financial management keep going on unchecked, debtors soon find themselves in the camp of all those who consider bankruptcy their only option.
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