How rising interest rates impact your financial health

Interest rates in Canada have been low for quite a while now, and we have seen the Bank of Canada raise the key interest rate a few times in the past year, with growing speculation that they will continue to do so. We know that Canadians are concerned about the impact of rising interest rates on their financial health.

As the Bank of Canada raises the key interest rates, the banks will use this higher rate as a measure to set their own prime rate of interest. Therefore, as the interest rates increase, it might help to understand the impact this will have on some of your unsecured debts and your financial health. 

Financial health is the ability to pay our obligations as they become due. As interest rates rise, depending on the type of debts we have, our ability to get out from under our obligations is going to become more difficult. 

The first step in understanding your financial health is to understand how the rise of interest rates will affect your unsecured debts. The most common types of unsecured debts are lines of credit and credit cards.

Line of Credit 

Interest rates on a line of credit will vary and depend on the terms you agreed to when you obtained the line of credit and will usually be at a lower interest rate than a credit card.

An unsecured line of credit is usually set with a variable rate — meaning an interest rate that will rise and fall with changes to the financial institution’s prime rate of interest.

Keep in mind though, that the interest is calculated from the date you use funds, and the rate of interest will not change based on the type of transactions you use the line of credit for. 

As a variable rate is subject to the bank’s prime rate of interest, as the interest rates go up, the interest rate on this type of line of credit will also increase. 

Credit Cards

Interest rates will vary with the card you have and with the financial institution.

• Low interest cards
  • Usually have the lowest rate of interest — rates will vary, and you see cards with rates of less than 15 percent.
• Rewards cards / regular credit cards
  • If you have a rewards card, likely the interest rate is going to be higher than a low interest credit card. Most credit cards have interest rates between 19 percent and go up to 23 percent.

Low interest credit cards should not be confused with promotional offers. Promotional offers are for a set time, and usually when that time is up, your interest rate will go up as well.

Interest rates will vary depending on the type of transaction your use the credit card for, and most cards will charge a higher rate of interest on cash advances. Therefore, if you use your cards for anything other than everyday purchases, check with your credit card company on what rate of interest you will be charged.

Financial Health

As the interest rates continue to go up, consider how you will keep your costs down, and stay financially healthy. Here are a few tips to start lowing your cost of using credit:

Line of Credit

• Start making more than the minimum payment to bring down the amount the interest is calculated on and reducing your overall debt (because as interest rates rise so will the minimum payment).
• Consider making a payment each payday.
• If you continually use your line of credit each month, examine your income and expenses to see if there is a way to reduce your spending so you no longer need to use the line of credit (as continued use of the line of credit will continue to increase your payment and the interest you pay).

Credit Card

• Pay your balance in full each month, prior to the due date.
• If you are unable to pay the balance in full, consider not using the card until it is paid in full.
• Make higher than minimum payments; the minimum payment barely takes care of the interest, you want to lower what you pay in interest, so making the highest payment you can afford will save you money.
• Make payments on each payday.
• Only use your credit card for budgeted purchases.
• Don’t use your card for cash advances.
• If you can transfer your balance to a lower rate card, do it and then continue working on paying off the balance.
• Don’t miss a payment; if you qualified for a lower interest rate, this rate may no longer be applicable if you miss a payment or if you are late on a minimum payment.

Need a hand? Call MNP

If your personal debt feels impossible to manage, rising interest rates can only add to your stress. But you don’t need to go through it alone. A confidential and no-cost consultation with your local MNP Debt office can help you find the best way out of debt, and into financial security.