Tips on Managing Debt When Interest Rates Rise
When interest rates rise, consumers are required to make higher monthly payments on credit products and loans - that might sound scary, but here’s how you can manage it.
According to the Financial Consumer Agency of Canada (FCAC), Canadians are carrying record amounts of debt.
"Many Canadians have high debt and low savings,” said Lucie Tedesco, Commissioner, Financial Consumer Agency of Canada. “Even a slight increase in interest rates puts Canadians at risk of carrying debt over longer periods of time, leaving them more vulnerable to unforeseen events or unexpected expenses. We know that those who budget, make plans to pay off debt and set savings goals usually succeed."
That being said, a rise in interest rates may be on the horizon, and the FCAC has advised that consumers take steps to manage the increase.
Here are a few tips on managing debt in the face of rising interest rates:
Pay down larger debts first, especially those with the highest interest rates
Make prepayments on a mortgage or accelerating mortgage payments
Cut expenses and put more money towards paying down debt
Avoid taking on more debt
Set aside savings to deal with unplanned expenses
Consolidate debts with high interest rates into a loan with a lower interest rate
You might have a credit product or a loan where interest rates could increase, such as variable interest rate mortgages, personal loans (shout out to student loans!), or lines of credit. Interest rate increases could also impact loans that are coming up for renewal such as fixed rate mortgages.
FCAC says that consumers may be more vulnerable to interest rate increases if a lot of their disposable income is applied to paying off their debt, since they may lack flexibility in their monthly budget to cope with higher borrowing costs.
"An increase in interest rates is a good time for Canadians to review their budgets and figure out how a rate increase could impact their finances. FCAC tools and information can help people make informed financial decisions when creating a plan to pay down debt and set savings goals,” said Jane Rooney, Financial Literacy Leader, Financial Consumer Agency of Canada.
Overall, it seems like consumers should budget and make informed financial decisions to help pay off debt in the face of rising interest rates.