111 Waterloo Street, Suite 310
London, ON N6B 2M4

Minimum wage and debt

July 16, 2018

Incomes in Canada are not keeping pace with the cost of living which is driving people to be more dependent on credit cards. Minimum wage earners , as evidenced in the linked CBC story, are highly likely to incur debt they can’t realistically manage. According to Statistics Canada incomes increased between 2012 and 2016 by 1.8% but the use of credit increased in a single year by 4.4%. Minimum wage and debt create a volatile financial situation, forcing low income earners to rely on credit to live.  As this dependency grows so does the willingness of lenders to write down or write off unpaid balances. Credit card issuers are also keen to sign up people with poor or no credit histories.

We see a lot of former bankrupts being discharged from bankruptcy and obtaining credit card limits of $3,000 within a year of their discharge. Credit cards for risky borrowers typically charge interest at 29.99% in some case more and rarely less. Considering the lender borrowed money at 1.5% the margins are immense and make the lending worthy of the risk.

Being in debt is an economic trap for borrowers who are often oblivious to the actual costs of borrowing. With Canadian consumers owing $800,000,000,000 in credit card debt and only half of them paying off their cards each month, the interest earned could be as high as $10,000,000,000 per month.

It appears to be impossible for people to pay off their debts while earning minimum wage. The cycle continues, to the point that the only escape is either bankruptcy or a proposal. Proposals, while easier to administer than a bankruptcy are most attractive to consumers and last year we saw more people file a proposal than file for a bankruptcy.

Minimum wage earners not only run the risk of being unable to complete the terms of their proposals but may have less risk associated with a bankruptcy filing. By contrast, bankruptcies are usually way faster and a lot cheaper than proposals and therefore more suitable for low income earners. Freeing up cash flow by reducing or eliminating debt seems to be a sensible option for all people struggling with minimum wage incomes.