Canadians should hit “pause” on debts
You may have seen headlines in recent days telling of how the Bank of Canada has decided to hold interest rates steady. While this is good news for debt-holding consumers, there is a reason that the BOC is holding their rates.
They anticipate some bumpy roads ahead in the economy.
Your inner consumer may be screaming, rates are low! Buy more, spend less! Time to race out and buy a bigger house/car/boat/TV!
Tell your inner consumer to take a seat and consider the following scenarios:
For some of you, ultra-low interest rates may be the only borrowing environment you’ve known. This is not (and I repeat, not) reality.
Yes, I realize that interest rates are very low at the moment, and that they have been for a number of years. And, yes, I realize that people (some of them very knowledgeable economists and think-tank types) have been saying for years that rates are going to go up.
That’s because they are.
And when that happens, the borrowing world as you know it will disappear.
Interest rates going up means more of your income is going to have to go towards servicing debt you already have. And unless you are a movie star or software billionaire, your income is not likely to go up at the same rate. That means more debt, less income.
Now, I’m dating myself here, but the 80’s weren’t all about neon and big hair. In the 80’s, interest rates hit the double digits (like high double digits). High, as in mortgage rates reached beyond 20 percent. Can you even imagine paying those?
Now we are a far cry from rates like those, but it underscores a point. Did you know that even a rate hike of one per cent or two will significantly raise your mortgage payments at renewal?
Shrink your debt
Instead of accumulating more debt, take a stand to send your debt load in another direction. Once interest rates go up, you’ll have a smaller debt load to manage.
As a rule of thumb, the less debt you have, the less vulnerable you’ll be to an increase in rates.
“In the current interest rate environment, people should stress-test their budgets to understand what their financial picture might look like in the event of an interest rate hike,” says Jeff Schwartz, executive director of Consolidated Credit Counseling Services of Canada. “Being proactive can go a long way towards avoiding debt disaster down the road.”
Take a month or two and pretend your income is lower. An increase in rates won’t actually decrease your income, but it will feel like it, because your payment amounts will most likely increase.
See how well you do with a lower income, and identify areas for improvement while you are still in control of your debt destiny.
Save up first
Saving up before a purchase seems like an out-of-date concept in today’s credit-crazy world. But that logic has been around for a long time, because it makes sense.
If you use cash rather than using debt wherever possible, you are less likely to run into trouble.
Would your debt load be manageable in the event of an interest rate hike? Are you able to reduce your debt load on your own? Call to speak to a trained credit counsellor and find out how you should approach reducing your debt. You can also try our free debt analysis online.