4 Debt Traps
and Strategies to
Overcome Them
Avoiding debt pitfalls that affect your financial
well-being today, and tomorrow.
With interest rates in Canada deliberately kept low in an effort to support the economy and stimulate
spending, it’s all too easy to embrace credit as a way of life. A recent BMO Wealth Institute Report
revealed common ‘bad debt’ traps that stand in the way of your financial success, and how ‘good debt’
can strengthen your financial position.
1
Debt Trap: Thinking all debt is the same
Debts can be loosely defined as being good or bad based on whether they enhance your
net wealth or destabilize your household’s financial situation. When contemplating the word
“debt”, the survey reveals that 43% of Canadians consider it to be bad (or ugly), and most
feel nervous or insecure when thinking about it.
The Opportunity: Borrowing is not ill-advised as long as the focus is on “good debts”
like mortgages and what they will allow you to achieve instead of “bad debts” like high
interest rate credit card spending and what these allow you to have. The focus should be
on funds that will enhance your wealth in the long run and include a plan to pay off credit
balances where possible.
2
Debt Trap: Leveraging low interest rates
to buy a more expensive home
Using low interest rates to get a larger loan on more expensive houses is a risky strategy.
Incremental increases in mortgage lending rates can add hundreds of dollars per month
to your payments which can lead to further use of credit to maintain your lifestyle.
The Opportunity: Low interest rates are the perfect opportunity to make a big impact
on paying down debt. Given that interest rates are likely to increase in the foreseeable
future, there’s no better time to put together a detailed debt management plan.
56%
of Canadians strive to
pay off credit balances
when possible
16%
of Canadians would be
unable to afford a $500
increase in their mortgage
payment from rising
interest rates.
3
Debt Trap: Not having an emergency fund in place
When you don’t have an emergency fund in place, illness, job loss or other unforeseeable circumstance can be financially
devastating. You may feel you have no choice but to turn to credit to keep you afloat while you weather the storm.
The Opportunity: A pool of money that is set aside to cover the cost of unexpected expenses or the loss of income is an important
component of any wealth plan. While your emergency fund may not be large enough to maintain your standard of living for the
entire time your income is reduced in the case of a major crisis, your rainy day savings will put you ahead in the long run.
4
Debt Trap: Maintaining your lifestyle with borrowed funds
It is remarkably easy to borrow to help you enjoy a standard of living that cannot be supported by earnings alone. But when you
habitually use credit to fill gaps in your earnings rather than for building equity, you could be setting yourself up for a lifetime of
paying down debt.
The Opportunity: Households carrying a high debt load are the most vulnerable to an interruption in income or an increase in
interest rates. Striving to pay down all debt, prioritizing ‘bad debt’ and making lifestyle adjustments that allow you to live within
your means will help you achieve a stronger and more stable financial position.
How can BMO help?
Debt makes many Canadians uncomfortable but as part of
a sound financial plan, it can enhance household financial
stability and create wealth. A BMO professional can work
with you to understand your debt needs. They can help
you plan for tomorrow while meeting your goals today.
A plan for
a stronger
financial future
Call 1-888-389-8030
or click here for more information.
“Household
debt in Canada —
the good, the bad,
and the ugly.”
Read the full report:
bmo.com/
wealthinstitute/debt
Source: BMO Wealth Institute, Household debt in Canada – the good, the bad, and the ugly.”, September, 2015.
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but is not guaranteed by us, may be incomplete, or may change without notice. It is intended as advice of a general nature and is not to be construed as specific advice to any particular person nor with respect to any
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