Everyone knows that borrowing money costs money. Beyond the interest charged, debt can take a toll in many other areas of life. Those costs can show up in finances, health, relationships, or time. Most Canadians carry some debt, whether that’s from a mortgage or consumer debt. Statistics show that total consumer debt in Canada amounts to a whopping $2.66 trillion, according to Equifax. Let’s go over all the ways debt can cost you, including more than just interest charges.
Understanding the Financial Costs
Financial costs are expected when taking on debt, but surprisingly, the total costs are still often underestimated. It is important to understand the total cost of a debt over its duration, not only the monthly payment. Companies can use debt financing to fund growth and expansion, but individuals don’t get the same tax advantages when they borrow, so the costs add up faster than expected.
With mortgages, loans, and credit card bills, the typical approach is to look only at the monthly cost and see whether that fits your budget. That approach doesn’t account for the full cost of purchase and can be misleading. When interest is calculated and compounded over the life of the loan, the total amount can be far more expensive than imagined.
Some Canadians struggle to make it to payday without running out of money. When that happens, the bank may charge an NSF fee or overdraft fee. Some turn to payday loans, which come with very high interest rates. More fees and interest make it worse for someone already struggling. If making your pay stretch to next payday is a challenge, explore Earned Wage Access as an alternative way to get paid early if your employer offers it.
Carrying too much debt or missing payments can lower your credit score. A lower credit score negatively impacts the interest rates you qualify for. The Bank of Canada (BOC) sets the policy rate; banks follow it and set their Prime rate accordingly. The rate you get quoted is an adjusted version of the prime rate, with increases or decreases influenced by market conditions and your credit rating. Lenders view Canadians with low credit scores as riskier, so they pay a higher premium to borrow.
Costs To Your Health
Debt can cause feelings of guilt, shame, overwhelm, and anxiety. These stressors can lead to ignoring bills or self-sabotaging behaviours like overspending mindlessly. Such behaviour can put us in deeper financial trouble. In addition to these mental health stressors, our physical health can also take a toll. Paying for ongoing healthcare, prescriptions, and healthy food can sometimes feel out of reach. This can worsen conditions and deepen the vicious cycle. There are steps you can take to tackle this challenge, and you don’t need to be embarrassed about your debt.
The Cost To Your Relationships
Living with debt makes social activities hard to justify. Connections with friends and family can deteriorate as we withdraw from group activities and dinners out. Living under pressure and stress can also make it hard to feel understood. Building up barriers to keep judgment at bay can lead us to wall off loved ones. Debt is a top source of relationship tension.
Opportunity Costs
Opportunity cost represents what we miss out on because of our choices. When we direct all money toward debt repayment, it affects our future wealth-building potential. Money going to interest owed today is money that isn’t compounding in your favour. It could be working for you in savings accounts, a TFSA, an emergency fund, or even low-risk options like bonds for the future. Missing out on RRSP contributions can mean a lost chance to lower your tax rate for the year as well, since RRSP contributions are tax-deductible. The tax savings you miss from CRA-approved deductions are a lost opportunity for both wealth building and tax reduction.
Do you find yourself spending a lot of time managing debt, worrying, tracking payments, and figuring out the best approach to paying it off? Time spent calculating and stressing over your finances is time you could spend on other activities that bring enjoyment. When you divert income to debt repayment, it can also delay life milestones like buying a home, starting a family, or taking a risk to change careers.
The Credit Score Ripple Effect
Canada has two credit agencies, Equifax and TransUnion, that track and report on credit use. If you miss a payment, the credit bureaus report it, which negatively affects your credit score. When your credit score goes down, your bank or credit card company is less likely to lend to you, and if they do, it’s at higher-than-average interest rates. That means Canadians with low credit ratings end up paying more for anything from a phone plan to a car loan, and even insurance.
Canadians who have difficulty paying off their debts may end up with bills that go to collections. If you have to deal with debt collectors, take time to get to know your rights and how to file a dispute. It’s best to address the situation quickly because debt collection is just the starting point for other actions like wage garnishment or repossession. To keep on top of potential issues, it’s a good practice to check your credit report at least once a year to stay aware of your score. Regularly monitoring your credit can also help protect you against fraud.
Calculating Your Own True Cost of Debt
Calculating the true cost of debt just takes a little math. List every debt you have, including credit cards, loans, mortgages, lines of credit, and family loans. Along with that, list out your loan’s annual percentage rate, monthly payment, and expected payoff date. Plug those data points into our online debt calculator to see the true cost of each loan over time. Tracking the annual interest expense may also help you see the impact. You don’t need bookkeeping training to get your finances in order.
Next, decide which debt payoff approach you want to take. Remember that even tiny payments toward debt can move you toward long-term success. A little planning and work go a long way toward keeping you from being overwhelmed.
Once you have mastered the financial side, write down the non-monetary costs to understand the true impact across your life. Reflect on the impacts beyond your bank account. How has debt impacted your family or social life? Has your health or well-being suffered because of being in debt? What have you given up the chance to do because debt repayment was your priority? Now flip the script. Write out how paying off your debt will save you money, improve your health, social life, and relationships. If you find yourself struggling to stay motivated to pay off the debt, look back at what you wrote. Refreshing your memory on why you’re doing it will help keep you on track.
Next Steps
When your finances feel overwhelming, you know it’s time to make a change. Debt affects your social and family relationships, and your general well-being suffers. Sound money management can start with a simple, no-obligation phone call. Talk to a debt relief specialist to help you kickstart your path to debt freedom.
