PEI

Take control of your debt as interest rates rise: 7 tips

Credit counsellor John Eisner offers his advice for taking control of your debt in the face if rising interest rates.

'It's going to start impacting your bottom line, so why not get on it early?'

'You will get caught, if you don't take this serious,' warns credit counsellor John Eisner. (iStock/Getty Images)

If you are like many Canadians, you are overextended. In June, Statistics Canada reported that Canadians now owe $1.67 in consumer credit, mortgages and non-mortgage loans for every $1 of household disposable income.

Now that the Bank of Canada has hiked interest rates and the major banks have followed suit, it's time for people carrying debt to turn a serious eye to their finances — especially since it is predicted rates could rise again in the fall.

It may seem small, but it's going to hurt.— John Eisner

"For the average consumer, take this as an early warning," said John Eisner, president and CEO of Credit Counselling Services of Atlantic Canada, a non-profit organization that helps people manage credit and debt problems. 

"You will get caught, if you don't take this serious," he warned. 

The interest rate hike will affect anyone with a variable-rate mortgage, lines of credit, credit card debt, Eisner said.

From his office in Saint John. N.B., Eisner offered his advice for taking control of your debt.

1. Call a family meeting

"I really believe the first thing should be, call a family meeting," Eisner said. "We don't talk about money and we really need to." 

'Interest rates I don't think are going to slow down,' says credit counsellor John Eisner. (Submitted by John Eisner)

Tell your kids how much money you and your spouse earn, and the cost of bills like mortgage, phone and electricity, he advises. And make sure they know how much difference a small increase in an interest rate can affect those bills.

"It may seem small, but it's going to hurt," he said. "It's going to start impacting your bottom line, so why not get on it early." 

"They see you living in a house, you've got two cars, they think you're rich!" he said. "But when you tell them you've gotta pay for everything, they'd better understand it."

Eisner believes children should learn better financial literacy and money management in schools, because many aren't learning at home. 

2. Have a budget 

The time is now, if you don't have a budget,  but Eisner said, "It's essential. You need to know where your momey's going."

Now is the time to start tracking your spending and know what you owe. (Shutterstock / Africa Studio)

Identify you necessities — mortgage, food, phone. Figure out if there are any ways where you can shave: eating out, cable, phone, entertainment. 

All this over a quarter-point rise in interest?

"A quarter of a point doesn't sound like much, but if you take a fairly sizeable mortgage, and for some that's on a variable rate that quarter point could mean $500-$600 over the course of the year off your bottom line," Eisner said. 

Same goes for a line of credit, Eisner said, if you owe a lot on it.

When budgeting for your car payments, be aware that car loans are likely to rise soon, Eisner reminds. 

3. Meet with your bank

It could be time to meet with your banker and seek a consolidation loan — where you put all your credit card and credit line debt together — which can help you obtain a lower interest rate and lower payment.

A  consolidation loan, with an interest rate of 8 to 10 per cent, will eliminate high-interest credit card debt of about 18 per cent.

4. Pay down your debts

Using the money you free up from a loan consolidation, Eisner suggests you immediately begin to pay down your debt.

"Start getting at it," he said. "Interest rates I don't think are going to slow down ... every time it happens, it's a little more out of your pocket." 

Time to ditch your credit cards and lower limits on credit lines. (Ryan Remiorz/Canadian Press)

5. Start an emergency fund

Most people don't have an emergency fund, Eisner said — they get overwhelmed by the advice that recommends people have three to six months of savings.

Start small, he advises. The first $100 will be the hardest.

If you find yourself doing well on putting money aside, put more down on your debt (tip 4).

"Let's say you've got $2,000 or $3,000 banked — pull $1,000 out and throw it on the debt," he said. Then continue rebuilding, reassessing every three to six months. 

6. Ditch your credit cards and reduce limits

Get rid of your credit cards, and reduce the limit on your line of credit, especially if you manage it poorly. 

"This is not the time to be accumulating more debt," Eisner said. "Take the temptation away."

A survey released last month found that of those polled, four per cent said they were 'very close' to declaring bankruptcy. (Simon Dawson/Bloomberg)

7. Be a saver

Higher interest rates can also work in your favour, if you're a saver. 

Interest rates on GICs and bonds will improve, Eisner said, so saving money will begin to look better than it has the last decade. 

'Interest rates on GICs and bonds will improve so saving money will begin to look better than it has,' says John Eisner. (Shutterstock)

ABOUT THE AUTHOR

Sara Fraser

Web Journalist

Sara has worked with CBC News in P.E.I. since 1988, starting with television and radio before moving to the digital news team. She grew up on the Island and has a journalism degree from the University of King's College in Halifax. Reach her by email at sara.fraser@cbc.ca.

now