Every day millions of Canadians are forced to make financial decisions. The outcomes of these decisions can have significant impacts on their lives. And while it would be nice for everyone to know the right answers when addressing personal debt and finance, this isn’t always the case.
People don’t know what they don’t know
A recent study conducted by Loans Canada with 1665 credit-constrained Canadians confirms the adage, people don’t know what they don’t know. Nearly 70 per cent of the 1665 survey subjects showed confidence in their financial know-how, but when asked questions about their financial habits, their performance told a much different story.
The study revealed that close to half of survey respondents who felt good about their financial literacy are not tracking their expenses or spending habits, and of these Canadians, all are not paying their credit card bills in full every month.
Many are not saving regularly.
And the most staggering Loans Canada finding? People who claim to be financially knowledgeable typically have more debt than people who claim their financial literacy is lacking.
Read all of LoansCanada.ca’s findings here.
Why are Canadians in Debt?
Spending money can be easy. In fact, the average Canadian consumer owes $8,500 in consumer debt, not including their mortgage. While around 12 per cent have consumer debt over $25,000.
Combine bad spending habits with not tracking expenses and not paying credit card bills in full each month, debt can accumulate very quickly and be difficult to pay off.
Without basic information on how to manage finances and financial literacy, not only can Canadians be more easily lured into debt but it can make it challenging for credit-constrained Canadians to climb out of a personal financial crisis.
Almost half of credit-constrained Canadians have taken out multiple loans, with 44 per cent doing so just to make ends meet.
The devastating effects of financial illiteracy and the consequences of debt
For Canadians, the consequences of financial illiteracy can be overwhelming, leading to unmanageable debt levels, poor credit ratings and derailed savings plans which in turn creates barriers to make ends meet or meet future goals or aspirations.
How can Canadians get a better grasp of debt problems?
Make note of debts:
Write down all debts to gain a complete picture of what’s owed. This assessment will help form the best strategy to reduce or eliminate debt.
Monthly budgeting is crucial:
Come up with a budget that factors in both fixed expenses like car and mortgage payments, variable costs and debt repayment. Get creative, weed out the needs and wants, and find new ways to reduce spending.
Pay on time, pay in full (if possible):
Nearly one-quarter of Loans Canada survey participants believe that making the minimum credit card payment saves them from being charged interest. It doesn’t. Pay on time and in full to avoid interest payments and potential credit score damage.
Lower the cost of debt:
Avoid larger interest payments by paying down debt carrying the highest interest rate. Refinancing or consolidating high-cost loans may lead to a lower payment.
Canadians can improve their financial well-being through financial literacy. Loans Canada’s research shows that being confident about financial knowledge does not protect from the pitfalls of bad financial behaviours.
"There are a lot of free financial literacy resources available to Canadians, both from the government and private institutions,” explains Loans Canada Chief Technology Officer, Cris Ravazzano. “For example, Canada.ca has a whole section dedicated to money and finances with great information that all Canadians can benefit from. And at Loans Canada we're always creating educational content about credit building and debt saving strategies. I think more effort is required to increase awareness about these types of resources."
Gaining and maintaining financial literacy is the foundation of good financial outcomes and greater financial health as a whole.
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