The middle class in Canada is increasingly feeling the strain of a mounting cost of living, with new statistics revealing that more individuals are resorting to debt to cope with financial pressures. This alarming trend comes alongside the phenomenon of a “K-shaped” economy, which exacerbates the disparity between the wealthiest and the most economically vulnerable Canadians. Recent findings from Equifax indicate a worrying uptick in debt levels, particularly among those with higher credit ratings, as they grapple with the realities of a challenging financial landscape.
Debt Trends Paint a Concerning Picture
In the final quarter of 2025, total consumer debt in Canada escalated by 3.13 per cent year-on-year, reaching a staggering $2.65 trillion. Notably, non-mortgage debt surged by 4.5 per cent during the same period. Consumers with credit scores ranging from 751 to 880 experienced a 6.1 per cent rise in non-mortgage debt, while those with scores between 320 and 580 saw little change. Rebecca Oakes, Vice-President of Analytics at Equifax Canada, highlighted the growing divergence, stating, “There’s more of a divergence happening, and a few of the higher income or low-risk people are kind of switching almost on that ‘K’.”
Despite these rising debt levels, experts caution that the critical factor lies not in credit scores but in the balance of income against rising expenses. Clay Jarvis, a mortgage expert at NerdWallet Canada, emphasised, “If your expenses are growing faster than your income, a 750 or 800 FICO score isn’t going to make you any wealthier.” He further noted that higher credit scores might inadvertently pressure homeowners into larger mortgages at a time of escalating costs.
Increasing Financial Strain for Households
The situation is further exacerbated by a notable rise in missed payments on non-mortgage debt. As of December 2025, the percentage of Canadian households failing to meet at least one minimum payment by 90 days or more surged from 1.64 per cent to 1.73 per cent—a 5.43 per cent increase from the previous year. This data, while reflective of conditions at the end of 2025, foreshadows potentially more severe economic challenges ahead. Oakes pointed out that the ongoing geopolitical tensions, including the conflict in Iran, could lead to heightened prices for essential goods, further straining household budgets.
Understanding the K-Shaped Economy
The concept of a K-shaped economy illustrates the widening gap between high-income earners, who are able to maintain or increase their spending without falling into debt, and low-income earners, who face diminishing purchasing power and are forced to restrict their expenditures. A November 2025 report revealed that while 26 per cent of consumers intended to spend more than $1,000 during the holiday season, a staggering 46 per cent planned to spend less than $500, with 15 per cent aiming for under $100. Oakes noted, “Our numbers are telling us that there definitely is more concern … coming from consumers in terms of affordability.”
This trend of decreasing consumer spending was particularly pronounced during the last holiday season, indicating a shift in behaviour as individuals prioritised financial stability over consumption.
The Impact of Rising Mortgage Debt
Mortgage debt has also seen a significant increase, rising to $1.95 trillion in the fourth quarter of 2025, marking a 2.6 per cent rise from the previous year. Oakes attributed this surge primarily to a wave of mortgage renewals, with many Canadians securing loans at higher interest rates than those available in the early 2020s. “Stronger credit scores may enable some consumers to access larger mortgages, but the payment shock they are now experiencing upon renewal is proving too much for many,” she explained.
The Bank of Canada recently maintained its benchmark interest rate for the third consecutive meeting but warned that the ongoing conflict in Iran could pose further risks to the Canadian economy, with some economists suggesting a potential need for interest rate hikes if inflation persists.
Why it Matters
The current financial landscape in Canada underscores the urgent need for a reevaluation of economic policies aimed at addressing the widening wealth gap. As more middle-class families find themselves grappling with rising debt and increasing living costs, the implications for consumer spending and overall economic stability become clear. If left unaddressed, these challenges could stifle growth and exacerbate social inequities, making it imperative for policymakers to take decisive action. The ongoing financial stress not only impacts individual households but also poses a significant threat to the broader economic health of the nation.
