With short-term interest rates up for the first time in seven years, the borrowing world is very different for Canadians, many of whom were teenagers back then, when credit cards and mortgages were not a concern.
But with the average credit card borrower in Canada owing roughly $4,100, according to recent data from TransUnion, the Financial Consumer Agency of Canada is looking to help people manage their debt with the hike in effect.
While an increase in the benchmark doesn't affect all financial products, it does impact credit cards, personal loans, lines of credit and variable interest rate mortgages, the FCAC noted. Because of this, it's a smart idea for borrowers to raise their monthly payments slightly to account for the difference.
In doing so, this may leave consumers with less discretionary income, given that a larger chunk of earnings now must go toward paying down debt due to the interest rate adjustment, which the Bank of Canada announced July 12 - the first since October 2010.
Lucie Tedesco, FCAC commissioner, stressed the importance of budgeting as the best way to account for the difference.
"Many Canadians have high debt and low savings," Tedesco said in a press release. " 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."
The government of Canada offers several basic ways to manage payments:
Interest rates on financial products vary, and this is especially true when the benchmark is adjusted higher. To accommodate for the alteration, try to pay down debts with the highest interest rates first, particularly on sizeable back payments.
Makes more regular mortgage payments
The quicker borrowers pay down their mortgage, the less money they'll wind up paying above the principal amount. If possible, make bimonthly mortgage payments. Alternatively, for those interested in buying a new home, consider paying a larger down payment, making the monthly amount more reasonable.
Set up an emergency account
Unpleasant surprises happen when they're least expected, and often require money to fix. Some of these developments may not be covered by insurance. Setting up an emergency fund can solve this issue, simply by contributing a certain percentage to the account with each passing pay period. Financial experts recommend between 5 and 10 percent.
"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," advised Jane Rooney, FCAC financial literacy leader. "FCAC tools and information can help people make informed financial decisions when creating a plan to pay down debt and set savings goals."
Canadians may be taking on more debt, but they're opening fewer credit card accounts, suggesting they're trying to steer clear of unnecessary outstanding expenses. Last year, active credit cards fell by more than 800,000 nationwide, according to TransUnion.