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New data reveals that Canada’s middle class is increasingly grappling with the effects of a rising cost of living, prompting more individuals to take on debt. This trend underscores the persistent “K-shape” economic recovery, which illustrates the widening wealth gap between the nation’s affluent and low-income populations. According to Equifax, households with higher credit scores are finding themselves in greater debt, raising concerns about financial stability across the economy.
Economic Snapshot: Debt on the Rise
A recent report from Equifax indicates that total consumer debt in Canada reached a staggering $2.65 trillion by the end of 2025, representing a 3.13 per cent increase from the previous year. Non-mortgage debt alone surged by 4.5 per cent. Notably, households with credit scores ranging from 751 to 880 experienced a 6.1 per cent uptick in non-mortgage debt, while those with lower credit scores (320 to 580) saw little change. Rebecca Oakes, vice-president of analytics at Equifax Canada, commented on the shifting dynamics, stating, “There’s more of a divergence happening… higher income or low-risk individuals are switching almost on that ‘K’.”
The implications of these findings are significant, suggesting that the financial strain is intensifying for many Canadians, regardless of their credit ratings. Mortgage expert Clay Jarvis of NerdWallet Canada echoed this sentiment, noting, “What matters is how much income you have relative to your expenses. If your expenses are growing faster than your income, a high credit score isn’t going to make you wealthier.”
Rising Delinquency Rates
Equifax also reported a troubling increase in missed payments, with the percentage of Canadian households that fell behind on non-mortgage debt payments by 90 days or more rising from 1.64 per cent to 1.73 per cent by the end of December. This marks a 5.43 per cent increase from the previous year and signals growing financial distress among consumers.
Oakes warns that the snapshot provided by this data may soon reflect even harsher realities, particularly given recent global events like the Iran war, which are expected to exacerbate inflation and elevate prices on essential goods. “All these headwinds… are just going to put more pressure,” she stated.
Understanding the K-Shape Economy
The “K-shape” economy is characterised by a stark divide: while higher-income earners can continue to increase their spending without accruing debt, lower-income groups are losing purchasing power and are forced to make significant cutbacks. A survey conducted in November 2025 revealed this divide starkly, with 26 per cent of consumers indicating plans to spend over $1,000 during the holiday season, while 46 per cent intended to spend less than $500.
Oakes remarked that recent data indicates a marked pullback in consumer spending, reflecting heightened concerns over affordability. “Our numbers tell us there is definitely more concern coming from consumers in terms of affordability,” she noted. “We saw quite a pullback in spending by specific groups during the holiday period.”
Regional Disparities in Debt
The rising levels of debt, particularly among mortgage holders, are most pronounced in provinces like British Columbia and Ontario, where cities such as Vancouver and Toronto have notoriously high living costs. Equifax reported that mortgage debt reached $1.95 trillion in the last quarter of 2025, marking a 2.6 per cent increase from the previous year, largely attributed to a wave of mortgage renewals.
Oakes explained that many Canadians locked in mortgages at lower interest rates in 2020 and 2021 are now facing significant payment shocks as they renew at higher rates. “Stronger credit scores and incomes may have enabled them to secure larger mortgages, but the reality is that the payment shock they’re now experiencing is just too much for some,” she said.
Interest Rates and Future Outlook
In light of these developments, the Bank of Canada has maintained its benchmark interest rate for the third consecutive meeting, amidst rising concerns that the ongoing Iran conflict could lead to long-term inflationary pressures. Some economists speculate that if inflation persists, the Bank may have to consider raising rates to combat it.
Jarvis expressed a grim outlook on the current sentiment, stating, “It’s just hard to be positive about anything. Anyone I speak to feels really down about their financial situation.” He further emphasised the precariousness of the situation, remarking that those who can navigate these challenges without constant worry are in a fortunate position.
Why it Matters
The rising debt levels and the widening wealth gap signal a troubling trajectory for Canada’s economy, particularly for the middle class. As consumer spending contracts and financial pressures mount, the implications extend beyond individual households to broader economic stability. Understanding these trends is vital for policymakers and stakeholders aiming to address the disparities and foster a more equitable economic environment for all Canadians.
