The psychology of B.C. residents and their debt

The Canadian Payroll Association’s annual poll of working Canadians living paycheque-topaycheque suggests that despite a strong economy, debt-related stress is on the rise in Canada and four-in-10 working Canadians feel overwhelmed by their level of debt.

This dovetails with a survey Credit Canada is releasing that takes the pulse of Canadians on the psychology of debt. The Credit Canada Debt Awareness Survey polled 1,517 Canadians and asked: “What freaks you out more: debt or interest?” Countrywide, the 18-34 demographic is much more likely to be “freaked out” by the amount of debt than the amount of interest, while seniors are more likely to be concerned by the amount of interest on that debt.

Truthfully, while millennials ranked the lowest when it came to knowing how much debt they have and how much interest they’re paying, overall awareness is low among all ages, which is an alarming statistic, to say the least.

But what really interests me is the B.C. findings. B.C. residents are most likely (40 per cent of respondents) to be “freaked out by interest” as opposed to debt principal. This is considerably higher than the national average (34 per cent are likely to be “freaked out” by the interest as opposed to debt). Meanwhile, next door neighbour Alberta is 31 per cent, and Manitoba and Saskatchewan come in at less than half the amount of B.C. (at 19 per cent).

B.C. residents are second only to Alberta in terms of being aware of how much they owe and second only to Atlantic Canada in terms of knowing how much they are paying in monthly interest. Alternatively, British Columbians are least likely in the country to know how long it will take to pay off their debts making fixed payments.

Across the country, Canadians generally show a trend toward interest-rate awareness as they age. Millennials are twice as likely to know their total debt as they are to know the interest rate on their debts or their monthly interest payments. Meanwhile, seniors are most likely to know all the numbers — their total debt, the interest rate on their debts and their monthly interest payments.

But overall, a shockingly low number of Canadians know how long it will take to pay off their debts (making either fixed or minimum payments). This brings me to the psychology of debt. Despite traditional economic theory, not all financial decisionmaking is rational — much is based on behavioral, emotional, cultural and social factors. Take, for instance, the snowball vs. avalanche approach toward debt repayment.

The snowball method involves paying as much money as possible toward the smallest debt, regardless of interest rate, while maintaining just the minimum payments on other debts. Once the smallest debt is paid off, payments are rolled over into paying down the next smallest debt, and so on. This way, a person knocks off debts one by one, and the payments “snowball” into faster debt repayment.

Conversely, paying down debt with the highest interest rate first is known as the avalanche approach — this involves maintaining the minimum on all debts, but paying the most money possible toward the debt with the highest interest rate, regardless of how much money is owed. This in the long run might save hundreds, if not thousands, of dollars in interest charges.

While the avalanche method is likely to save money in the long run, many prefer the snowball method because paying off the smallest debts first achieves quick upfront wins, which can be a motivating factor for some and helps them stay on track with their debt repayment.

A study from the Journal of Consumer Research suggests the snowball method is more likely to succeed because of the psychological benefits and instant gratification related to paying off a debt balance faster.

In the end, it usually comes down to personality. There are free tools such as debt calculators that are available to consumers seeking to determine the best approach. For those looking to pay off debt faster and save on interest, debt consolidation is often a good option.

Whatever method people choose, it’s important to remember: The only wrong way of repaying debt is to stick your head in the sand and avoid paying it altogether. Laurie Campbell is CEO of Credit Canada, Canada’s longest-standing credit counselling agency.