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.

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