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Credit Coach: Will rising interest rates be a problem for me?

As interest rates continue to go up in Canada, many Canadians likely have two questions on their mind.
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As interest rates continue to go up in Canada, many Canadians likely have two questions on their mind. Why are interest rates going up? Should I be worried?

After almost seven years of no increases, the Bank of Canada began raising the prime lending rate last July. The most recent increase resulted in a prime lending rate of 1.25 per cent. Based on some predictions, we’ll see more increases in the coming months.

Generally speaking (I am a Licensed Insolvency Trustee, not an economist), rising interest rates are a sign of a healthy and growing economy. When things in the economy are going well and growing well inflationary pressures and a rising cost of living follow. The rise in the interest rate is one way of making the cost of borrowing and buying more expensive, thereby slowing down the growth and inflation that comes with it.

So, rising interest rates are a good thing, right? That depends. If you are close to retiring and your financial picture is all set, rising interest rates mean a little better return on your fixed income investments. However if you and your family are struggling with debt or your household budget is already tight, you might get squeezed by the rate increase.

You will begin to see a rise in your cost of borrowing, especially credit card interest, variable rate mortgages and home equity lines of credit tied to the prime rate. If you have a budget that is tight and you’re living paycheque to paycheque, you might be affected.

If you find yourself in this situation, surviving the rate increase might be easier if you take some of the following steps:

  1. Before you make any long-term purchases look at the overall cost of the item. You may be able to afford the monthly payment for a car, a cell phone plan or a furniture suite now, but what about down the road? Having worked with many families facing budget crunches, I often see decisions made based on whether the payment can be squeezed into the budget, not on an item’s total cost. Decisions such as this tend to tighten up your budget flexibility and make interest rate increases tougher to handle.
  2. Swap out debt. If the financial gurus are to be believed, further interest rate hikes are on the horizon. If those hikes will cause a budget crunch for you, look for ways to lock into a fixed rate product. This may not save you money in the short term but will give you a fixed repayment that can be budgeted for and protect your from future unknowns.
  3. Make the budget adjustments today. Don’t wait for an emergency to arise. Making small changes to your day-to-day spending now, such as cutting down on to-go coffees, lunches out or pizza Fridays could help you avoid larger cutbacks in the future, such as selling of an asset to cover a credit card payment.

Plan ahead, take the necessary steps to take control of your finances, get some help and be ready. Interest rates will rise and fall — the greater economic forces are out of your control. What you can do is have a budget, think through your purchases and build the flexibility needed to adjust to interest rate changes into your household finances.

Jayson Stoppel is a Licensed Insolvency Trustee and Chartered Accountant with BDO First Call Debt Solutions. With over 17 years in practice, Jayson assists individuals, families and companies with financial difficulties in Thunder Bay and throughout Northwest Ontario. To reach Jayson by email:  JStoppel@BDO.ca 





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