Between inflation, housing costs and interest rates, debt is increasing for many young Canadians.

Scott Terrio sees it all the time. The consumer insolvency officer says the average credit card balance in Canada is less than $4,500, but the cases he saw last year averaged more than $12,000 in the younger demographic.

Mr. Terrio helps clients reach agreements with creditors and avoid bankruptcy, where possible, at Hoyes, Michalos Licensed Insolvency Trustees. Looking at its 2023 records for customers aged 18 to 29 in Ontario, it said average credit card debt was up 34.5 per cent from 2022.

Jeffrey Schwartz, managing director of Consolidated Credit Canada, notices the same trend. The national non-profit organization usually works with Canadians on education and debt restructuring, but also sometimes refers clients to insolvency companies if their situation is dire.

“We compared the first quarter of 2023 to the first quarter of 2024,” Schwartz said of the company’s customer base. And specifically for people under 40, among our customer base, we see that the debt level of these people has increased by about 27%. When all of a sudden people aren’t earning much more, if any more at all, […] not to mention interest rates have been rising recently, then it becomes more and more of a challenge. »

This is an important demographic for Consolidated Credit Canada, he added. More than half of its clients are under 40.

From then on, Mr. Terrio says, they feel relieved – and they continue to spend.

Once they’ve turned their debt into a line of credit, consumers should get rid of their credit cards and live off their cash as much as possible, he argued. But their debit card remains unused, while they continue to use credit almost everywhere.

“They are increasing their Visa card again because they did not cut up their card,” said Mr. Terrio. So now the banks have had you three times, and they’ve had you for life. »

Mr Terrio says the same story is repeating itself and he criticizes the ever-increasing limits offered to young people when financial literacy is typically at an all-time low.

However, current market conditions cannot be ignored.

As Mr. Schwartz noted, Canadians are feeling the pressure of incomes that have not kept pace with the cost of living, housing crises in markets across the country, and high interest rates aimed at controlling the inflation.

Managing spending and debt is becoming a tightrope walk, especially for young people, Schwartz said.

“So with the advent of social media and the ease with which someone can buy something online, we see that consumers have adopted behaviors where they try to keep up with their friends and family,” he said. -he indicates.

He also warned of what’s known as lifestyle evolution, when people start earning a little more money and simply start spending more.

“They may see a slight increase in their income and they think, ‘Oh, I just won the lottery, and now I’m going to spend like crazy,'” Schwartz said. And it’s difficult to change these behaviors after they become ingrained. »

To prevent this from happening, it’s advisable to monitor your spending diligently – apps for this are available – and delay steps such as moving or getting a car if it’s possible to do so, Ms. .Schwartz. It may be wise to build up an emergency fund in the event of a loss of a source of income or a financial setback, to avoid falling into heavy debt.

“If you have the opportunity when you’re young, you’re not spending as much on rent, you’re not spending as much on food, if you can cut back on your social activities, that’s a good context to start building that reserve fund,” Schwartz said.

Living according to your monthly cash flow – using your debit card or cash – and developing a short-term austerity plan can go a long way toward paying down debt, Terrio said.

The summer months are tough for austerity because people want to socialize, he said, but January to March is a good time to stick to a strict budget. Up to 40% of non-rental income should be spent on reducing debt, Terrio said, noting that short-term austerity is tolerable because it ends quickly.

Ultimately, the goal is to reach the tipping point where at least half of one’s debt repayment goes toward principal – and the portion going toward interest begins to decline.

Once you’re debt free, keep your credit limit low and decline offers to increase it, Terrio said. By transferring your debt to a line of credit, you stop using your credit card.

“You decide how much debt you owe, not the bank, right? says Mr. Terrio.