Experts share tips for young Canadians finding themselves in debt for the first time

MONTREAL — While enrolled at university, Eloho Orogun was approached on campus to apply for a $500 student credit card, which was being advertised as a way to improve his credit score.

Encountered a self-described shopping problem, it wasn’t long before Orogun opened up a second, larger-limit student ID card.

“The more money I had, the more debt I would get,” he said.

Bad spending habits and a lack of understanding of how credit cards work led him into a spiral of debt that took him seven years to break out of.

A report by Equifax Canada released earlier this month found that Canadians aged 35 and under owe the least amount of money but are the worst at paying off their credit card balances.

The average delinquency rate for Canadians in the third quarter of this year was 7 percent higher than in the same period last year. That number was higher among young Canadians, with the 18-25 year-old category seeing a 33 percent increase and an 11 percent increase in the 26-35 year-old category.

Rebecca Oakes, head of advanced analytics at Equifax Canada, said there have been far fewer missed credit card payments during the pandemic, whether because they were spending less or with the help of government support.

While default rates are still below pre-pandemic levels, Oakes said the spike could signal challenging times.

“It’s not an alarm bell yet, but clearly financial stress is starting.”

Natasha Macmillan, Director of Everyday Banking at Ratehub.ca, said there are two main reasons for the uptick.

The first is pent-up spending due to the pandemic, as many want to take vacations and attend the events they were unable to attend during the pandemic.

The second is the impact of inflation, as financial pressures mean more and more people are turning to their credit cards for assistance.

Oakes said younger age groups tend to be a little more vulnerable during periods of high inflation because their incomes don’t adjust like other generations do. She said young people are also less likely to have higher savings, which can provide a buffer against high prices.

Adding to the rising cost of living is the added cost of celebrations and gifts brought along by the holiday season.

It’s easy to spend a lot more at this time of year, but Oakes said it’s important to consider future implications.

“Coming in January, February, can you make these payments? It’s always a good start,” she said.

Instead of buying extravagant gifts, Macmillan said he should consider giving gifts or doing a secret Santa gift exchange to reduce the number of gifts bought.

If you’re struggling to manage debt, Macmillan suggests tracking your monthly expenses and creating a budget, particularly to identify where nonessential expenses can be cut.

“Calculate your average monthly budget and see what you have left over to pay off your debt,” she said.

Macmillan recommends two methods for paying off mounting debts: the avalanche, in which the debt with the highest interest rate is paid off first, and the snowball, in which the smallest balance is paid off first for one less thing to worry about.

“It really depends on what works for people and where they get those small wins.”

Orogun took an aggressive approach to finally breaking out of his cycle of debt.

He put all of his money that wasn’t used on essential payments toward paying off what he owed.

“[A credit card] It’s a tool, meaning you control it, you use it to your advantage,” he said.

This report from The Canadian Press was first published on December 20, 2022.

Caitlin Yardley, The Canadian Press