With the US Federal Reserve hiking its key interest rate for the first time in almost ten years, all eyes are on the Bank of Canada. However, analysts believe that the BoC is set to keep its interest rate at 0.5%, the same level it has been since July 2015. A rate hike is not on the horizon. In fact, it is more likely that the BoC will cut rates in the near future.
However, borrowers should not be complacent. The BoC is only expected to stand pat on its decision until 2018, after which Governor Stephen Poloz may begin tightening rates. This means that there is enough time for borrowers with bad credit to start preparing for the time when interest rates will go up.
What does an interest rate hike mean for borrowers? According to the credit-monitoring agency TransUnion, more than 700,000 Canadian borrowers could see a hike of at least $50 in their monthly debt payments if interest rates increase by a quarter-point. If they increase by a full point, however, as many as a million borrowers could be affected.
Thus, borrowers at risk should take action to prepare for a rate hike. Those most vulnerable are the ones who carry debt with variable rates, such as those with mortgages. In addition, many borrowers with good credit ratings and high credit scores are likely to be affected, since they have taken on high levels of debt on the expectation that rates would remain low indefinitely.
One of the things they can do now is to start paying down their debt. There are a number of debt repayment strategies they can adopt. For example, they can increase payments to the loan that has the lowest balance, while paying just the minimum required for the other loans. Once that one is paid off, you can do the same for the loan with the second-highest balance, and so on until you have paid off all your debt. The savings you enjoy from having paid off one of your loans can be applied to the other loans to help pay them off faster.
Another popular repayment strategy is to focus on the loan with the highest interest rates, using the same method described above. Once that loan has been repaid, move on to the one with the second highest rates, and so on.
You can also ensure that your credit score remains high so that you’ll continue to enjoy the most favorable rates for credit, even if key interest rates are hiked. One simple thing you can do is to pay your bills on time. You should also avoid applying for too many credit cards since this can hurt your credit score due to the issuers conducting credit checks on you.
Finally, if you feel that you will have trouble dealing with your debt, you should not hesitate to seek professional help. You can work with a financial adviser to help you come up with a sensible debt management plan based on your current financial situation.