MNP Personal Bankruptcy Trustees warn consumers not to spend more on cheap credit and take this opportunity to pay down debt
For cash-strapped Canadians, the news that the interest rate has been cut by 0.25% by the Bank of Canada seems like good news, but MNP Personal Bankruptcy Trustees are asking consumers to be wary. While many will now feel encouraged to spend or borrow more now that the rate has decreased, this is exactly what not to do.
“This isn’t the time to start borrowing more,” warns Lana Gilbertson, Personal Bankruptcy Trustee with MNPDebt.ca, “It’s the time to start paying down the principal on debts and saving for the future. The interest rate will indeed go up eventually, and when it does, Canadians will want to put themselves in the best financial position possible.”
With the household debt-to-income ratio in Canada currently at a record high of 162.6%, a large number of consumers need to assess their financial situation and choose ways of decreasing their overall debt.
Lana Gilbertson suggests the following advice to help indebted B.C. residents improve their financial standing:
1) Focus on paying down the principal now
Despite the low interest rate for years, many haven’t worked away at their debts. With the interest rate now even lower, it’s time to focus on paying down principal. Consider paying a lump sum on the principal debts now.
2) Start a rainy day fund
A recent CIBC poll showed that 74 per cent of Canadians who experienced an unexpected event or emergency did not have enough savings required to cover the unplanned spending. Emergency savings, or a rainy day fund, can help families prepare for interest rate increases, layoffs, medical bills, or other kinds of unexpected bills.
The best way to slowly start putting money aside is to set up a new savings account, specifically for emergency savings, with automatic withdrawals from your chequing account to the new account. The general rule is to save at least 3 months of your salary.
3) Lock in at low interest rate
In recent years many Canadians have taken advantage of low interest rates while purchasing homes. Low rates are good news to new home buyers, and those on floating rate mortgages, but consumers should also consider locking in at this new, lower interest rate.
“Especially for those buying a home right now, the low interest rate is very attractive,” explains Gilbertson, “But if interest rates do increase down the road, they should be considering whether or not they’ll be able to manage higher interest payments. One way to mitigate this is to lock in at the current low interest rate.”
By Angela Joyce