While recent debates have largely focused on the housing market and on the risks associated with household mortgage debt, MacGee looks more specifically at consumer credit – auto loans, credit card debt, and lines of credit – and personal bankruptcies. Consumer credit accounts for roughly 45 percent of total household interest payments, he notes, and often offers variable interest rates, leaving borrowers more vulnerable to higher interest rates. Further, the rapid expansion of new consumer credit products, especially home equity lines of credit, raises real concerns about whether lenders and borrowers have been overly optimistic.
While the recent US experience highlights the risks of overextended consumers, more prudent lending standards in Canada suggest that, under likely scenarios, consumer debt levels should remain manageable. Nonetheless, these high levels of debt leave Canadian consumers vulnerable to large economic shocks – notably a sharp rise in interest rates or an economic downturn.
MacGee says lenders and regulators need to (i) evaluate carefully whether current capital levels of financial institutions are sufficient to guard against these risks; (ii) gather better and more detailed data to paint a more complete picture of these risks; and (iii) ensure that regulations related to household credit are appropriate and consistent over the business cycle, rather than constantly attempting countercyclical regulation. MacGee emphasizes the need for continued efforts to improve financial literacy and simplify the disclosure of credit contracts, to help consumers make informed borrowing choices.
For the study go to: http://www.cdhowe.org/the-
It’s too easy to get credit. Even teenagers (over 18) are being offered plastic these days, and I keep getting loan company letters telling me to pick up my $5000 or whatever amount they are pre-approving me for.
People need to think not only about meeting the monthly minimum payment, but actually paying back the loan early to cut down on the interest they’ll be paying. I can see using credit for a car or house, but many people put meals, clothing, or whatever, on their credit cards and wind up paying huge interest rates for the privilege.
In high school, I remember learning all kinds of algebra and other math I’d never need. I wish they’d teach about compound interest and other actualities that adults face. It might prepare people better to live with less debt.
Some people will always need protection from themselves so a blend of rules towards their protection whiile also forcing people to take responsibility for their actions would be a good thing. Perhaps a cause and effect study should be done concerning disposable income versus taxes would be helpful for governments so as to decrease their grab on our wallets and tax rates…..
I am one of those that do not carry cash and use a card for gas, meals etc. but always pay the monthly balance. I know store owners could be taking a 4% hit from the small profit, but hey, I got air miles and am not tempted use the cash for impulse buying. LOL
In the high school I attended, for grade 12 mathematics we were given two choices: Technical math, which included algebra, and Financial math, which included compound interest rate calculation. For science we could take Physics (Newtonian), Chemistry and Biology. However we were not given a course option in Astrology, which would of, arguably, provided us with the greatest insight in what’s happening to the world right now, including high debt levels for unevolved boomers.