Don’t let rising interest rates create debt problems for you
Consumers may be breathing a sigh of relief with the Bank of Canada’s decision to hold rates at the most recent rate announcement on October 25th, but the respite may be short lived. What’s more is that Canadians who took on lots of debt over the past few years during the ultra-low interest rate environment are feeling the pinch of recent rate hikes over the summer.
It begs the question: if these small rate increases are already placing debt stress on Canadians, what is going to happen if rates continue to increase, as many analysts expect that they will?
According to a recent study from MNP Ltd.:
- 1 in 3 Canadians are already feeling the pressure of rising interest rates with their current debt loads
- 42 per cent of respondents don’t feel confident they’ll be able to cover expenses for the course of the next year without accumulating more debt
- 42 per cent say that they have less than $200 left every month after meeting expenses and debt obligations
- 70 per cent acknowledge that they need to be more careful about how they spend their money
- 4 in 10 feel that if there are additional rate hikes, they will be in real financial trouble
“While a small rate hike won’t mathematically increase your debt payments a great deal, however, if you’re already stretched to the max, this survey demonstrates that there is no wiggle room to make those payments, ,” says Jeff Schwartz Executive Director, Consolidated Credit Counseling Services of Canada.
“The low interest rate environment that has extended over the past decade or so has given people a false sense of what they can really afford. The tendency has been towards spending. But now that rates are climbing, the focus has to be on savings, spending within your means and paying down existing debt,” says Schwartz.
Here is how to avoid letting rising interest rates create debt problems in your household:
Stop spending. Right now.
If your current debt load is causing you stress now, can you imagine how much stress it will cause you if it grows bigger? Also, it goes without saying that you are never going to become debt-free if you continue to accumulate debt.
Put your credit cards away and commit to cash only. This can be a challenge if you are relying on credit to cover costs or as your emergency fund. You can take steps to reverse the cycle.
Build up cash flow
If you are going to be living a cash-based lifestyle, you need to free up the cash flow in your household. That may mean a combination of cutting costs wherever you can and increasing your income if possible. Consider part-time employment or selling your belongings to have more cash at hand. Cut out non-essential spending to keep your costs down. Look for ways to get the same products and services you require at a lower cost.
Debt repayment plan
In order to create some breathing room and stop living paycheque to paycheque, you need to come up with a solid plan to repay your debts. Pick your highest interest bearing debt first, because that will impact you the most as interest rates rise.
Don’t direct all of your money towards debt repayment. Put some in savings every month too so you won’t have to turn to credit in an emergency.