How to avoid a debt crisis
Financial planners offer advice on navigating your deferred payments
Since banks and other lenders started offering Canadians the option to defer their payments — on mortgages, credit cards, student loans and more — thousands have taken the opportunity to press pause while the COVID-19 pandemic affects our wallets.
According to the Canadian Banking Association (CBA), more than 760,000 Canadians have either deferred their mortgage payments or skipped a payment via13 of the association’s member banks as of June 30. Thousands more have deferred their credit card payments.
Some have been laid off or had their work hours reduced, while others want to save their money for fear of what happens in the months ahead.
But a deferral isn’t forgiveness, and it isn’t permanent.
This fall, the thousands of Canadians who have been skipping their debt payments could find themselves with more debt than before — and potentially higher monthly payments to make.
Some might not be able to make those payments and could have to file for insolvency. But you don’t have to be one of those people — we spoke to three financial planners who offered up their advice on how to make sure you’re not one of the unfortunate borrowers caught up in what could be a devastating and fast-approaching debt crisis.
Yes, you’ll owe more Cynthia Kett, a principal with Stewart & Kett Financial Advisors in Toronto, said in most cases, Canadians who deferred their debt will owe more when payments resume, as interest has accumulated.
However, that doesn’t mean monthly payments will necessarily be higher — for example, mortgage terms could be extended as part of the deferral, she said.
“You’d have some choices as to how much the payments are when they resume. Either they would continue on as they were before, but you’d pay them for longer. Or, you could increase the payments to make up for the fact that you had that deferral,” she said.
“I think it would depend on the individual debtor’s situation, whether they were now back to work and could afford to catch up.”
Watch your credit rating Janet Gray, an Ottawa-based certified financial planner with national firm Money Coaches Canada, said as long as your payment deferral or agreement is official, your credit score shouldn’t be harmed. If it is, she said it’s possible the lender reported incorrectly, and you can get that fixed.
That’s also why it’s best to make partial payments on bills that haven’t been deferred, she said — if you fall into arrears, that will affect your credit score.
“It’s incumbent on the institution to report it, so it’s less likely they’re going to report partial payment than a nonpayment,” she said.
André Bolduc, Ottawa-based senior vice-president with BDO Canada, added that while your score may be fine during the deferral period, it’s important to plan ahead, as any missed payments after the deferral ends will be detrimental to your rating.
“As long as you’re making the agreed upon payments with your lenders, your score is going to be fine,” he said. “But you have to know coming out of COVID-19 what those payments are going to be.”
Communication is key Kett said communication is crucial right now. Instead of avoiding your lender, talk to them about your situation and ask about your options. They’ll be able to tell you what to expect when payments resume and they may be able to help you change your payment plan if your financial situation is dire.
“If you don’t ask, you don’t get,” she said. “It’s in the creditors’ interest to help you make your payments. That’s really what they want.” Gray agreed. “It’s very important to have that communication with your lender because otherwise they think that … you’ve forgotten about them and then they start talking punitive measures.”
She also recommended you read your deferral agreement closely so you know what to expect.
Budget, budget, budget Kett said budgeting is key — regardless of whether you’ve deferred your debt. In particular, she said it’s time to weigh wants versus needs, and consider cutting certain monthly expenditures like your Netflix subscription, which can add up.
“Maybe you can find enough savings in those different places to accommodate the catch-up payments that you’ll have to do later,” she said.
Other things that could be temporarily cut are donations or a second phone, she said.
Gray suggested taking a look at your food bill and putting more planning into shopping for groceries.
Don’t be afraid of free Gray said during the pandemic, many people feel deserving of “treats,” given how stressful the situation is. But she said treating yourself doesn’t have to be an expensive occasion — in fact, it doesn’t need to cost a cent.
“Free isn’t a dirty word,” she said — there are whole communities on Instagram or Facebook dedicated to passing on unused items or even swapping.
You might find something you want, or something you really need, on one of these platforms.
Say no to more credit Bolduc said it’s important not to rack up more credit during the deferral period, if possible. For example, he said it’s better to dip into your Tax-Free Savings Account than to add another credit card to the pile. But he cautioned not to touch long-term savings like retirement accounts unless it’s absolutely unavoidable.
For example, some people with highinterest credit card debt may seek a consolidation loan, said Bolduc, only to continue using their credit cards.
“I see people falling in that trap often,” he said. And of course — stay away from payday loans, he said.