Pay now or pay more later — as borrowing costs go up

The Bank of Canada’s latest rate increase has raised the cost of borrowing, as well as the importance of paying off debts.

Credit cards often carry interest rates in the double digits, some of the most crippling in the debt world. So anyone carrying a balance on one should make it their top priority to pay off — even if the big banks’ decision to raise their prime rates doesn’t directly impact credit card rates, said Credit Counselling Society president Scott Hannah.

“If a person is regularly carrying a balance on their credit card, that’s a problem,” he said.

About 44 per cent of Canadians are $200 a month or less away from financial insolvency, according to accounting firm MNP.

Credit agency TransUnion said earlier this month that average non-mortgage debt stood at $29,312 per person, including an average credit card balance of $4,154. But about half of Canadians pay off their credit cards each month, so the burden is actually much higher for those who don’t.

Tackling debt can seem daunting, and many consumers choose to ignore the problem by paying only the monthly minimum, but an honest financial self-assessment and some planning will pay dividends in the long run.

The first step in taking on messy finances is to draw up a workable budget. If your morning latte is a must-have, keep it, and look for other areas in your budget to scale back on.

Hannah thinks it’s important to pick the card with the smallest balance and pay that off first.

Consolidation loans are an option as they will provide a single lower rate of interest, but Hannah recommends waiting until you establish a track record of sticking with a budget, which could take months or years.

Online loans from less established lenders may appear to offer a seemingly cheaper rate, but Hannah warns consumers to carefully review the terms. Actual rates can be much higher than those advertised, and can carry hefty penalties for things like late payments, so borrowers should be extra wary of the terms.

Transferring balances to a low-interest credit card can cut interest payments, but doing so often triggers a balance transfer charge. That also still relies on credit cards, which Hannah says people need to give up altogether until they get out of debt.