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As lending gets tighter, Canadians face threat of credit card trap: Don Pittis

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This column is part of a series we’re calling Debt Nation looking at the state of consumer debt in Canada.

Even after a decade of rock-bottom borrowing costs as low as two per cent, agencies that help Canadians overwhelmed by debt say their clients are still loading up on some of the most expensive debt in the market by borrowing on their credit cards. 

Now as interest rates rise and sources of borrowing shrink, financial literacy experts worry that many more consumers will fall into the same trap of using that high-cost debt to cover day-to-day expenses.

Recent research by for-profit insolvency advisers BDO Canada Limited, conducted by the polling firm Ipsos, puts some colour on the Canadian credit card debt burden.

Read more stories in our Debt Nation series:

Contrary to BDO’s advice, Canadians did not use record low interest rates as an opportunity to pay down debt.

“We used the low interest rate environment to acquire more debt to acquire things we wanted,” president Doug Jones said. That included real estate. But as house prices rose, people borrowed against that real estate to buy other stuff such as cars, renovations and holidays. And now that interest rates have begun to rise, existing debt will become an increasing burden.

Making ends meet

While credit card interest rates are high, usually in the 20 per cent range, those rates are agreed between banks and consumers in periodic contracts, and so tend not to fluctuate with short-term swings in rates. But for consumers who are already spending everything they earn, rising rates on other sources of borrowing such as mortgages, cars and lines of credit make the easy availability of credit cards a dangerous temptation.

“As the cost of borrowing goes up, your ability to make ends meet is going to become lessened,” Jones said. The BDO survey shows signs this is already happening for many Canadians, he said.

“People were saying, ‘Well, we’re going to have to make some sacrifices here in order to make our budget work,’ and one of the sacrifices they made was, 27 per cent of them said: ‘I’m not going to pay off my credit cards.'”

According to the Canada Mortgage and Housing Corporation, high property prices mean the majority of new homebuyers have already maxed out their budgets. As rising borrowing costs eat further into disposable income, avoiding the credit card debt trap will only become more difficult. (Jonathan Hayward/Canadian Press)

According to one of Canada’s largest non-profit credit counselling agencies, by the time people become so overwhelmed by debt that they reach out for help, they typically owe between 55 and 60 per cent of their non-mortgage debt on credit cards.

“The average person who comes into credit counselling has generally, on average, six or seven creditors,” said Patricia White, national president of Credit Counselling Canada, the parent organization of 18 not-for-profit agencies across the country. “And very likely there are three or four cards in there.”

An everybody problem

White says there are more expensive borrowing traps than credit cards, including payday lenders. And Jones says he encountered one young couple with a bad credit rating who had a car loan with a rate of 42 per cent.

But the credit card trap is by no means just a poor person’s problem, White says, partly because so many of us use cards to get loyalty points. Paying with credit cards has been normalized for people of all ages. The problem, she says, is running up debt is easy; paying off debt is hard.

“I think it’s an every-kind-of-person problem,” she said.

Paying by credit card has become increasingly convenient. All you have to do is tap. But financial expert Terry Goodtrack says if you can’t pay off your credit card bill in a month, you are living beyond your means. (Don Pittis/CBC)

And according to Dan Kelly, president of the Canadian Federation of Independent Business, that extends to entrepreneurs who commonly run up debts on their credit cards with the expectation, or hope, that they can get through a difficult period.

Kelly said he did it himself when he was starting out as a consultant. And he says he can hardly criticize business people who do everything they can, including mortgaging homes and going into personal debt, to keep their business afloat.

Many successful businesses go through such phases, he says. Banks are often reluctant to lend money during hard times, but taking on credit card debt requires no one’s permission.

“It certainly can be a lifesaver in certain emergencies” he said. “You’re setting up a coffee shop and your espresso machine breaks and you need to buy a new one and you need to do that today. You don’t have the money to do it. So you can put it on a credit card.

“But you do that too many times and you can drown in the debt, and obviously the interest that is charged can be overwhelming.”

Rainy day fund

And that slide from tiding yourself over during a bad time to overwhelming debt can happen so easily, especially if people lose a job or face a serious illness. With interest rates so low and banks anxious to lend for so long, many Canadians came to think it is normal to always be in the hole. But as interest rates rise, being in debt becomes more and more expensive, especially if you resort to credit cards.

Instead, Terry Goodtrack, president of the Indigenous business support group AFOA Canada, says everybody should have a rainy day fund.

But advice like that is only really useful in advance — before it starts pouring. It’s less helpful for those who are already struggling to pay off debt.

Goodtrack, who is helping to advise the federal government on a plan to increase financial literacy that goes into top gear in November, which the government has designated Financial Literacy Month, worries that people have become too comfortable with credit and credit cards.

“The problem with that is that easy access gets some people into trouble in the long term,” Goodtrack said. “If you can’t pay off your credit card in a month, you’re living beyond your means.”

Keeping back a reserve for hard times, running a carefully balanced budget and always paying off your credit card is sound advice, but for many Canadians struggling to make ends meet, it is easier said than done.

As the Canada Mortgage and Housing Corporation revealed last week, high property prices mean the majority of new homebuyers have already maxed out their budgets. As rising borrowing costs eat further into disposable income, avoiding the credit card debt trap will be harder than ever.

Follow Don on Twitter @don_pittis

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Real Estate

The cost of renovating your bathroom in Toronto in 2021

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Home renovations can be a big task, especially bathroom renovations where you have to work with either an awkwardly shaped space, or one with lots of pipework and very little natural light.

Nonetheless, getting a bathroom renovation by Easy Renovation to change your existing bathroom layout, improve the ambience or add more natural skylights can be worth all the trouble. But determining how much a bathroom renovation would cost is important while setting a budget.

The pandemic has changed a lot of things with social distancing rules, working from home, and for some, being made redundant. Therefore, having a complete grasp of the financial implication of a bathroom innovation is very important.

Owning your dream bathroom can be made a reality and the good thing is, regardless of your financial situation, there are always available options. If you also decide to put up your property for sale in the future, a bathroom upgrade would be a great investment—as it would add significant value to the property. Your bathroom renovation project, like every home renovation, can either be very affordable or extravagant, but one thing is certain, you’re bound to have a more refreshed, stylish and modernistic space.  

Looking through detailed sketches of luxurious and expensive bathrooms can be quite tempting, especially when you’re on a budget. However, your bathroom can be equally transformed into something that looks just as modern, stylish and refreshing but without the heavy price tag.

Conducting a partial bathroom renovation means you only have to change a little part of your existing bathroom rather than tearing it down and starting from scratch. If you intend to carry out this type of bathroom renovation in Toronto, depending on the size of your bathroom, you can spend between $1,000 – $5,000. With a partial bathroom renovation, you can save money by tackling smaller problems that exist in your present bathroom—or you can just upgrade a few of its features.

Partial bathroom renovations are quite affordable and would leave your bathroom feeling new and stylish without being time-consuming or a financial burden—which is important considering the economic impact of the pandemic. Repainting the bathroom walls, replacing the tiles on the floor and in the shower area are examples of partial bathroom renovations which is the cheapest to accomplish.

A more expensive and popular bathroom renovation is the standard 3- or 4-piece renovation. This renovation type involves a lot more services that are not covered by a partial renovation budget. To execute a standard bathroom renovation in Toronto you need a budget of about $10,000 – $15,000.

Unlike with a partial renovation, you would have to make a lot more changes to various elements of your bathroom without the hassle of changing the overall design. You can easily restore your current bathroom into a modernistic and classy space that fits your existing style. Making changes to more aspects of your bathroom is quite easy since there is more room in your budget to accommodate it.

A standard 3- or 4-piece renovation includes everything in a partial renovation plus extras such as revamped baseboards, installing a new bathroom mirror, buying new lights, installing a new vanity, changing the toilet, and buying new shower fixtures.

If you’re one of those looking to make a complete overhaul of your existing bathroom, then the option of a complete bathroom remodel is for you.

Unlike a bathroom renovation, remodelling means a complete change of your current bathroom design and layout for one that is newer and completely unrecognizable. The possibilities when remodelling a bathroom are endless especially when you have a large budget of over $15,000. That way, you can get the opportunity to create the perfect bathroom for yourself.

In addition to all that’s available with a standard bathroom renovation, bathroom remodelling allows you to make bathtub to shower conversion, relocation of plumbing, relocation of the toilet, reframing the bathroom and even relocating the shower.

In conclusion, a bathroom renovation can be a very important upgrade to your home and depending on the features that you decide to include, in addition to the size of your bathroom, this would influence the total cost of the project.

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Real Estate

7 Tips For First-Time Home Buyers In Calgary

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Buying a house for the first time can be overwhelming to say the least. If you’re wondering what neighbourhood to go with, what you can afford, or even how to just get started on the process, let us take some stress off your hands! We’ve teamed up with Hopewell Residential to give you 7 tips to ensure the home you end up with is everything you dreamed of.

Hopewell Residential is a five-time Developer of the Year award winner, so their expertise is second-to-none in Calgary and beyond. Who better to learn home-buying tips from than the homebuilders themselves?

Create a checklist of needs & wants

This is a biggie. When you’re buying your very first home, you’ll want to weigh your needs vs. your wants. Ensuring you have what you love in your first home is a big, big deal.

What should you do? Easy. Set up a list of needs and a list of wants, but be pretty strict with yourself, and make sure you take your lifestyle into consideration. With the increase in remote work over the past year, it’s important to keep in mind that a home office or flex room might just be the key to maximizing at home happiness. Especially if you’re thinking you might be expanding your family later on, spare rooms and extra space is key (but more on that later!).

Or for instance, you might need a home in an area with a high walkability score, but you want to be close to certain amenities. Set yourself up with the right level of compromise and the number of homes that actually fit your ‘perfect’ idea will skyrocket.

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Real Estate

‘Don’t give up’: Ottawa Valley realtors share statistics, tips for homebuyers in ‘extreme’ sellers market

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The real estate market in the Ottawa Valley can be summed up this way: people from far and wide are in a buying frenzy, but there’s hardly anything to buy at the “store,” and the limited inventory is overpriced.

This “stampede” — as one realtor described it — will affect rural towns as residents grapple with finding affordable housing and agonize over their inability to purchase homes in their price range.

“We are seeing a lack of inventory in all price ranges,” said Laura Keller, a real estate agent from Carleton Place.

Helen Vincent, a Renfrew realtor, said she’s never seen a market like this in her 36 years of practice. “We postpone offers for four to five days in order to get all the buyers,” she said.

Multiple offers — between seven and 10 — became the norm, with cash offers and no conditions, as buyers faced bidding wars. “In Ottawa, they have up to 50 (offers),” she added.

“It’s very stressful. You’re going to get nine (people) ticked off, and one happy. So many people are disappointed,” Vincent said.

Terry Stavenow, an Arnprior realtor for 40 years, said that “the pent-up need took over with inventory going low. It made a stampede on everything that was available.“

“Brand new housing — it’s very much gone. Several building developers are rushing to get inventory. They usually don’t do construction in the winter months,” said Stavenow.

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