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Why You Should Consolidate Debt Before Interest Rates Rise

November is Financial Literacy Month in Canada, which gives Canadians an opportunity to reflect on their debt and re-examine their finances. While one study has found that Canadians are increasing their net worth at a faster pace than their debt, it’s still worth noting that household debt grew by 21 per cent from 2010 to 2014. Many people in Ontario have taken on mortgage debt at low interest rates and might be looking for help with managing debt once interest rates rise.

Credit card spending on less-than-essential items could also lead Ontarians to seek help with bad debt. On average, people in Ontario have set aside $41,088 for emergencies, but there are still 24 per cent of Canadians living paycheque to paycheque. With the Bank of Canada (BoC) lowering interest rates to 0.5 per cent this year, those who are getting by month-to-month have been able to service their debt at low rates, but what happens when rates rise? If you have a variable-rate loan or mortgage, the interest rates you’re paying on your debt will go up as well. Now might be the time to get debt help, or consolidate your debt, ahead of a future interest-rate increase.

In June, the BoC went on record saying that the biggest risk to Canada’s economy would be a decline in jobs and income that could prevent Canadians from paying off debt. In Sudbury, the unemployment rate sits at 7.3 per cent, which is slightly higher than the overall rate in Ontario (6.7 per cent). We have not experienced the kind of recent job losses seen in Alberta, where massive layoffs in the oil patch have left many seeking help to deal with their mounting debts.

In fact, once it’s put into place, the new federal government’s plan to increase infrastructure spending could actually help reduce unemployment in Ontario. But some economists caution that increased government spending could also lead to a rise in interest rates, sooner rather than later. For Canadians already having difficulties in managing their debt, it might be best to look into debt consolidation before rates ultimately will go up. When it comes to your mortgage, you can stress-test your debt with a mortgage calculator to see what impact an increased interest rate would have on your payments.

If you want to consolidate debt, you’ll likely be getting a loan from a bank or finance company. Debt consolidation loans help you pay off multiple forms of bad debt, like credit cards, with one monthly payment instead of having multiple debts with different interest rates to worry about. You’re generally able to get a lower interest rate on a consolidation loan than you would on a credit card, which can reduce your monthly payments in the process. That way, if your mortgage rate does go up, you won’t have to worry so much about paying off all your credit cards at the same time.

There are other ways you can consolidate debt, including a consumer proposal. Before interest rates rise in Ontario, it would be a good idea to talk to a debt help professional and explore all your options. There are also tools from the Financial Consumer Agency of Canada (FCAC) that can help you deal with both good and bad debt, whether it’s a mortgage or credit cards. Take advantage of Financial Literacy Month to get help with your debt so you get ahead going into 2016.

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