You've reined in your spending, tweaked your budget and started shopping sales—but with interest rates only going up, it’s time to finally deal with the dark debt cloud still hanging over your head.
Driving the news: A new report commissioned by insolvency firm MNP LTD found that 60% of Canadians are concerned about the impact of rising interest rates on their finances, particularly their ability to pay down their consumer debt, per the Financial Post.
- On average, Canadians hold over $20,000 of debt, excluding mortgage debt.
- Renters feel they are in a more precarious financial situation than homeowners, with 63% saying they are concerned about debt repayment compared to 48% of homeowners.
Why it's happening: As the cost of living continues to rise and wages stagnate, people are paying more for less and being forced to use credit to bridge the gap—balances increased 6.4% between Q1 and Q2 of this year.
- Credit cards have some of the highest interest rates, at 19.99% on average, and are becoming more expensive as borrowing costs rise across the board.
- For example, paying off $20,000 on a card with 19.99% interest over 12 months would cost you an extra $2,231.
Why it matters for your money: Along with reducing variable expenses, paying off high-interest debt is the best way to prepare for a recession. Easier said than done, but there are two tried and true methods for accelerated repayment, each with its benefits and drawbacks.
The Avalanche method costs less in the long run.
- You make minimum payments on all your debts except the one with the highest interest rate, which you funnel all your extra cash towards.
- This way you maximize your savings and clear the most expensive debt first.
The Snowball method may not be as mathematically optimal but can be useful if you need to see progress to stick with your debt repayment plan.
- In this method, you pay off the smallest debts first. This tactic can give you the motivation to continue repayments as you see your debts disappear faster.
- But you'll pay more than with the avalanche method, especially if some of your larger debts also have high-interest rates.
Bottom line: We haven't officially entered a recession yet, but the Bank of Canada is now saying there’s a 50-50 chance it’s coming next year. The faster you can get on top of your debt, the better off you'll be in the long run.