The Impact on loans for Bad Credit and Credit Card Debt
Dating back to reports released by the Bank of Canada in December, the discussion of raising interest rates in 2015 came up once again. Now as we have seen already a couple of weeks into the new year, the rates still remain the same.
This is sure to be a topic on the mind’s of individuals across the country. For our family it is also a key piece of information as we look to plan ahead for how we will effectively manage our loans and other financial responsibilities this year. For all us, knowing when exactly this increase will occur is of the utmost importance.
While we may not be able to predict when this will occur exactly, reviewing various statements released by financial analysts and taking their cue can provide more of an answer and a timeline for this increase. Back in December experts predicted that interest rates would eventually be increased, perhaps as early as mid-2015 or some time during the month of May. Reasons for this increase also come of the heals of a higher level of growth seen in the Canadian economy. In particular, as inflation grows, interest rates are typically to go up.
Another forecast surrounding this topic, is that it will be businesses that will feel the affects the most and households, less so. This is because of the fact that many personal loans, like car loans and mortgages are more likely to carry fixed interest rates. With that being said, once the rates are increased, consumers will notice a difference quite quickly.
Knowing this reality is a good reason, if there ever was for taking action now. If borrowers know they will require loans, perhaps they will plan to take out the loan before the increased rates. Another important consideration to make is to understand how these rate hikes will impact your debt. With potentially negative effects on the horizon,paying down debt is a good plan of action. Credit card debt is one of the leading causes of debt loans, so focusing your attention on managing this debt now, will be important.
While some believe that household debt may not be as affected as businesses and companies – those that will ultimately be the most affected will be the ones that are carrying around high levels of debt and with already higher payments, these payments are only going to grow. Looking at the numbers is always a beneficial way to understand how you debts will be affected. For example, when looking at credit card debt, for a credit card with a balance of $10,000, with let’s say an 18% interest rate, this typically requires a monthly payment of $150.
With the predicted interest increase of 0.5%, this payment moves up to $154.17, this reflects a monthly payment increase of $4.17. With higher credit card balances, this will mean that your payments will shoot up even higher. Therefore, if you are already overextending yourself financially, with the higher rates your debt levels could become even more unmanageable, causing you to fall further and further into debt.
Additionally, with an 0.5 interest increase occurring in May, for example, the rates could then be increased once more – and this can mean credit card and other debt will accumulated even faster. There are however, ways to improve your finances and pay down your debt before this occurs. Many financial experts and debt specialists will recommend paying down your higher interest rate loans before you look at paying down the others. While there are a variety of different methods of reducing debt, perhaps in this scenario, where high credit card debt is a concern – and with interest rates soon to go up, unloading your higher interest debt could be the best approach at this point in time.
One other strategy to pay down your credit card debt, in order to better prepare for the increased rates could also be to make two minimum payments each month. If you are currently strapped for cash, although you don’t want your interest charges to increase too much more, this can be a better method of balancing your income with your payments. This approach to debt relief may benefit borrowers who get paid on a bi-monthly schedule, yet require most of the money for other payments and expenses. If you can only make the minimum payment at a time, yet will have enough money to make another payment of the same amount two weeks later, then you can definitely curbed your interest charges and work towards paying down your debt a bit faster. This approach can also compliment the other credit card payment strategies and could make things easier on you when your rates go up.
Interestingly-enough, while perhaps the path many people are taking is to take out more loans now before the rates are raised, perhaps the priority should instead be to pay off your debts, while they are lower and while you can. Either way, if you start the higher interest rate era off with less debt, this can place you in a better position for the remainder of the year as well as going into the future, when rates may elevate even further.
