Earlier this month, Wealthsimple published an entry in their “Money Diaries” series that was anxiety-inducing for anyone who read it. Kate and Tom live “in the suburbs of a city in the northeast of the U.S.,” have three kids, degrees in law and advertising, and a combined income of US$160,000 — before taking into account the $100 to $250 Tom makes per night bartending several nights a week. But they also have, by their own, possibly modest estimation, nearly $600,000 in debt — only $360,000 of which consists of mortgage loans. Credit card debt, student debt and other loans account for the rest.
The story was steeped in disclosures that seemed to speak to bad decisions made: the home purchase that was “a stretch”; the three kids in a private school where annual tuition fees are usually $32,000 per child (they get a discount); the $18,000 owed in taxes from cashing out his 401K to pay three credit card bills (and to fund “a pretty good Christmas”). By the entry’s end, she was crying while confiding that they would never be able to afford a divorce. He revealed that he’d kept a damaged car after its lease had expired and pays a “huge interest rate on it.” She found out about the car during the interview with Wealthsimple.
The details were by all accounts awful, but what stuck out was the fact that this couple was still… going. At one point during the entry, Kate says that they continue to receive credit card and loan solicitations, all the time. “When they come, we research them and make sure it’s not something really crazy,” she said. “Obviously they’d have to be slightly crazy to approach us with a loan. But then we ask them for it, and they give us money. It’s ridiculous.”
Lenders, in other words, still want their business — and are even going out of their way to hand money out to them. How, exactly, is this possible?
On paper, Tom and Kate might be model borrowers
To get approved for multiple loans, what you need first and foremost is “good” credit. And as counterintuitive as it sounds, the criteria that credit bureaus use to assess a person’s level of risk might have actually made it possible for Kate and Tom to both have high credit scores. All of which speaks to an interesting point: in a culture that habitually conflates good credit with “moral” character — good credit, it seems, speaks to integrity, an ability to keep promises made — we often forget that credit systems are actually their own beast, and therefore function according to their own rules that have less to do with how “good” you are, and more to do with how well you follow the system. Much of the time, these rules can actually work to hurt consumers.
Toronto-based insolvency specialist Scott Terrio says Tom and Kate could actually be model borrowers for lenders.
In both the U.S. and Canada, Terrio says, there are five factors that credit bureaus take into account to determine your credit score. The two factors that weigh the most are your payment history (whether you’ve paid your bills on time) and your credit utilization (the percentage of available credit that’s been borrowed). The three other factors are the length of your credit history, your new credit, and your credit mix.
In their “Money Diaries” entry, Tom says that he treats their bills “like a puzzle,” and tries to pay each bill as their deadline approaches. While he doesn’t specify exactly how much of each bill he pays, as long as he meets his and Kate’s minimum payments on each loan, that would be enough for them to maintain a “good” payment history since they’d still be observing the contractual obligations set out by their lenders.
However, this good score could be negatively impacted by their credit utilization, which is essentially the difference between your balance and your limit. If they’ve maxed out all their lines of credit, then their score is going to go down. But, if they keep opening new lines of credit, then the difference between what they owe and how much credit they have access to will continue to grow — which can impact their score positively.
That explains why they keep being offered new loans. Lenders are in the business of making money off your interest payments — and as long as you show you’re willing and able to pay, they’ll keep soliciting you.
“If you’re a young couple in your 30s making decent money, and you’ve ‘only’ got [thousands of dollars] in debt, they’re still going to be pushing it on you,” Terrio says. “We still see that.”
Their situation is becoming more common than you'd think
The details in Kate and Tom’s “Money Diaries” entry are scandalous, but their situation — where a person’s spending far outpaces what they earn, and they can only afford the minimum payments on their loan bills — is becoming increasingly common in both the U.S. and Canada, says Terrio. And you don’t necessarily have to be sending your kids to private school or shopping exclusively at Whole Foods to get there, either.
“It’s happening everywhere,” says Terrio about growing debt loads. “It’s not only conceivable — I see it every week in here now. I mean, we’re in the insolvency business, so we get all the … more difficult cases. But I can tell you that debt has normalized quite a bit in the last few years — like, even 10 years ago, starting to see a change in people who really should be doing better.”
Take the example of Kervin and Kyra, a couple living in Surrey, British Columbia, who was profiled in The Walrus last year. The couple had relocated to Canada from Mauritius in 2010, and have steadily been accumulating debt since 2014, when Kervin took time off from work to help care for Kyra after a C-section surgery. When Kervin finally returned to work, he found that his job was no longer waiting for him. The next few years found Kervin only able to secure contract positions, Kyra taking on jobs that didn’t pay enough, multiple moves, and the couple eventually being forced to take out payday loans to pay for daycare. Their debts swelled to more than $150,000 by 2015.
Part of the problem, says Terrio, are lifestyle expectations — people are trying to live in ways that they can’t actually afford. But in Canada, at least, it’s also because banks are no longer as lenient as they used to be, as the economy continues to recover from the financial crisis and banks have lowered their barriers to accommodate.
“We’re hearing lots of stories about people getting turned down for debt consolidations and the banks are upping their lines of credit [or] interest rates without letting [customers] know — or without their prior knowledge,” Terrio says.
And as long as things continue down this road, personal debts will likely continue to grow and more people will end up in Kate and Tom’s situation. Who knows: you might already know some of them — or even find yourself in the same position.