Is This the Right Time to Reduce Canada’s Debt?

Is This the Right Time by Alan Cleaver
Is This the Right? Time by Alan

It took Canadians quite a long time to realize what has been clear to some for years: our debt-to-income ratio is at an alarming height. Despite some improvements over the last month, the household market credit debt, which includes mortgages, consumer credit, and loans, is still as high as 150.6 per cent of the income of an average Canadian household. The debt-to-income ratio became a major issue in economic news after it hit a record high in the third quarter of 2011 at the level of 151.9 per cent.

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The biggest hazard associated with a high debt ratio is the effect it could have on your credit score and your creditworthiness. The possible troubles stem from the fact that the ratio is often used as an indicator of your level of financial responsibility. In this manner, having a high debt-to-income ratio can have a major impact on your ability to obtain new loans or credit, rent a home, or get a job in an extreme case.

the International Monetary Fund
The International Monetary Fund
Furthermore, according to a recently issued complex study by the International Monetary Fund, it may be high time for Canada to get rid of the expansive household debts. The analysis pointed out that while economies in good condition would be able to absorb sudden drops in house prices, the downturn that would be preceded by huge household debts, the fall in overall economic activity would be much more significant, and the recovery would be slower and much more painful.

The IMF concluded that the severity of a crisis is largely determined by a combination of falling house prices and pre-bust leverage. When people’s house prices fall, they start to feel poorer, and once this effect is combined with attempts to pay off debts, overall consumption in the economy is severely reduced, causing grave problems for the economy.

To avoid such scenarios, Canadians should do more to tackle their debts. According to some studies, most people feel that they are in a safe zone when it comes to their debt situation. However, another survey shows that about 20 per cent of Canadians wouldn’t be able to handle a 2 per cent rise of mortgage rates and their theoretical ability to find a house would be severely hampered. Such findings lead us to the fact that self-confidence of most people is built on relatively high real estate values and extremely low interest rates. So maybe it’s time to start shaving off our household debt more radically that we did until now ,and always try to keep in mind that taking on more debt than we’re equipped to handle can have a shattering effects on our households.

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