We don’t blame you if you haven’t been watching the Business News Network (BNN) on television, but interest rates are going up – and that directly affects you, your household, and your finances.
How exactly? The higher the rates go, the more expensive it will be to service your consumer debt. And we all know how difficult it is to keep up right now.
You pretty much have three options in such an environment:
– Pay off your debt in one fell swoop.
– Ignore the rising rates and go deeper into debt.
– Adapt to the situation and come up with a plan.
Options one and three are good, but it’s best to avoid option two.
So, what’s the solution? Here are five tips for adapting to higher interest rates when you’re in debt:
1. Determine Your Personal Debt First
When you don’t know how much debt you have, then you know you’re in too much debt already.
Unfortunately, when you are indebted – credit cards, auto loans, and student loans – you are paying a hefty sum of money every month just to service the debt. This is known as interest.
As the central bank gradually normalizes interest rates, it’s going to cost you a lot more money to maintain the red ink.
So, find out what you owe, to whom, and what your interest rates are.
2. Start with the Small Debts
Have you ever heard of the snowball effect in the world of personal finance?
If you don’t want to pay an exorbitant amount of money on your debts, then you need to begin paying them off. This starts by paying off the small debts first and then gradually working your way up to the big ones. While it may seem hard at first, you’ll realize once you start checking them off one by one that you should’ve done it in the first place.
These small victories are not hollow!
3. Contact the Creditors Before Rates Are Adjusted
Many indebted Canadians are bracing for rising rates, especially since it will cost them billions of dollars every year. It will be difficult to weather the financial storm.
A simple solution is to get in touch with your creditors and negotiate to freeze today’s interest rates.
Let’s be honest: Creditors want to get their money back, and if you tell them that’ll be difficult to repay if the rates are too high, then they will compromise and come up with a proper solution.
There’s no harm in trying this method.
4. Financially Plan Rising Rates
On the other hand, if your creditors refused to extend this gesture, then you have no other choice but to adapt by financially planning for the rising-rate environment.
How much can you afford? How much more is your debt going to cost you? What spending cuts can you implement?
There’s going to be a lot of planning and a lot of questions. It is your job to find out what you can handle. Remember, there’s no use in complaining about your debt. You need to take action now!
5. Refrain from Borrowing More
So, there is one more thing you can do that can guarantee you are not too impacted by rising interest rates: avoid going deeper into debt!
That’s right. It might be a marvel idea for many people who are addicted to debt – and not you, of course! – but it is a sure-fire way of refraining from forking over even more of your hard-earned money.
In other words, spend within your means, avoid using your plastic too many times, cut down on your spending, and establish a budget and figure out just where your money is going and how much you’re taking in. These may be old-fashioned ideals, but they go a long way in padding your finances, particularly when the central bank is raising interest rates.
It has been a decade since the Great Recession, but the BOC has only recently pulled the trigger on rate hikes. While BOC officials have warned about skyrocketing household debt levels, Canadians have ignored the calls and took on more debt.
Now that rates are going up, it is up to you to start taking action, otherwise you’re going to spiral out of control and barely keep your head above water.