Why Young Adults Fall into Debt Traps and How to Escape

Between rising inflation, higher housing costs and increasing interest rates, many younger Canadians are seeing their debt grow rapidly.

Scott Terrio, manager of consumer insolvency at Hoyes, Michalos Licensed Insolvency Trustees, encounters this regularly. While the average credit card balance in Canada is under $4,500, the cases Terrio handled last year for clients aged 18 to 29 averaged more than $12,000—nearly three times the national figure for that group.

In 2023 Terrio helped negotiate with creditors and steer clients away from bankruptcy where possible. Reviewing his Ontario filings for 18- to 29-year-olds, he saw average credit card debt climb 34.5% compared with 2022.

That pattern is echoed by national non-profit Consolidated Credit Counseling Services of Canada Inc. Jeffrey Schwartz, the organization’s executive director, says their client data shows a sharp rise in borrowing among younger people. Comparing Q1 2023 with Q1 2024, the average debt load for clients under 40 increased by about 27% in their files. Consolidated Credit serves many young Canadians—more than half of their clientele is under 40—so these trends are a significant portion of their caseload.

Should you move credit card debt to a line of credit?

Terrio describes a familiar trajectory: young adults open a credit card at 18, add a student loan, then receive periodic limit increases. As balances rise and interest mounts, they often move the balance to a line of credit because it offers a lower rate—and they feel immediate relief.

That relief can be short-lived. Terrio says many clients continue spending after transferring debt. If you transfer a balance to a line of credit, the responsible next step is to stop using your credit card and rely on cash flow or debit for everyday spending. Too often, people leave their cards active and simply rack up new balances, compounding the problem.

“They run their Visa back up because they didn’t cut up their card,” Terrio says. “So now the banks got you three times, and they got you for life.” He’s critical of generous credit limits offered to young people who typically have lower financial literacy and limited adult financial experience.

Are economic factors to blame?

Macroeconomic forces are certainly part of the story. Wage growth for many Canadians hasn’t kept pace with the cost of living, and housing affordability challenges are widespread. At the same time, central banks have raised interest rates to combat inflation, increasing the cost of carrying debt.

Schwartz adds that social factors play a role, too. Social media and the convenience of online shopping encourage impulsive purchases and the desire to match peers’ lifestyles. When incomes stagnate but spending expectations rise, debt accumulates quickly.

How to avoid lifestyle creep

Lifestyle creep—spending more as income rises—is a common trap. Schwartz advises people to track every dollar spent, using budgeting apps or simple spreadsheets, and to delay major lifestyle milestones if possible. Building an emergency fund should be a priority so short-term setbacks don’t force reliance on high-interest credit.

When you have fewer fixed expenses early in your career—for example, lower rent or fewer family responsibilities—you have a prime opportunity to save. Cutting back on discretionary socializing for a period can accelerate the growth of a reserve fund that protects against future income loss.

Terrio recommends living within your monthly cash flow, primarily using debit or cash, and creating a short-term austerity plan specifically aimed at debt reduction. That focused effort can make a large dent quickly.

When to focus on debt repayment

Choose a period when austerity is most realistic—many find the post-holiday months from January through March easier for strict budgeting. Terrio suggests dedicating up to 40% of non-rent income to paying down debt during a short, intense repayment phase. The goal is to reach a point where at least half of each payment reduces principal so the interest portion steadily declines.

Avoid high-interest instalment loans. “All these 36 to 48% interest loans that are $10,000—if you get one of those, you’re done,” Terrio warns. “You’re never, ever getting out.”

Once debt is repaid, keep it that way: decline unsolicited credit-limit increases, keep limits conservative, and don’t resume credit-card spending. If you move balances to a line of credit, commit to not using the card again.

“You decide how much debt you’re going to have, not the bank,” Terrio says. He advises young borrowers to accept smaller credit limits if offered—$5,000 instead of $20,000—because smaller balances are manageable and solvable without years of financial hardship.

Read more about debt:

• Canadians are financially stressed—is money trauma to blame?
• The real costs of buying a car
• What happens if I don’t pay my credit card bills?
• Where to get help if you’re struggling financially (and mentally)