JEANE HERMAN
Special to The Morning Star
For cash-strapped Canadians, the news that interest rates have been cut by the Bank of Canada seems like good news, but MNP personal bankruptcy trustees are asking consumers to be wary.
While many will now feel encouraged to spend or borrow more now that the rate has decreased, this is exactly what not to do. This isn’t the time to start borrowing more. It’s the time to start paying down the principal on debts and saving for the future.
Interest rates will indeed go up eventually, and when they do, Canadians will want to put themselves in the best financial position possible.
Historically, the interest rate cuts made by the Bank of Canada have not had an impact on the amount of interest you are paying on credit card debt, and if the banks don’t lower their prime rate, the cut to the Bank of Canada interest rate may not affect the interest on a line of credit or other forms of credit.
With the household debt-to-income ratio in Canada currently at a record high of 162.6 per cent, a large number of consumers need to assess their financial situation and choose ways of decreasing their overall debt.
Indebted B.C. residents should use the following advice to improve their financial standing without having to file a consumer proposal or a bankruptcy:
1. The easiest and most effective option is to work on a monthly budget and stick to it. Look at where you can reduce some of your expenses without giving up everything. For example, take a look at your budget and examine your entertainment, dining and / or clothing expenses and see what can be cut back. Use any extra money at the end of the month to pay down your debt.
2. Another option is to call your credit card companies and ask for the lowest interest card possible. You may lose your points or rewards, but the money saved on the lower interest payments will be worth it.
3. Do you have any assets, like a house, extra cars, savings, investments, RRSPs, etc? If you do, depending on your level of debt, you may want to use your assets as collateral to get a loan at a much lower interest rate and then pay off your other debt. You could also choose to sell the assets outright and use the funds to pay off your debt. The key here is to speak to a professional so you are coming up with a long-term solution, not just a temporary quick fix. If selling the asset doesn’t allow you to pay your debts in full, this may not be the best option for you.
4. Another option is to go to your bank and ask for a consolidation loan. Basically this involves you asking the bank to give you an amount of money large enough to pay off all your debt, leaving you with just one payment to the bank at a lower interest rate. For this to happen, you need to be qualified by the bank. If you do, the bank may lend you an amount of money to pay off your other higher debts. The only issue is that for this type of loan, the bank usually only lends money for debts that you have at their bank.
As you can see, you do have options before bankruptcy or a consumer proposal. They key is dealing with your debt problems early on so they do not become overwhelming.
Jeané Herman, CIRP, is a licensed trustee with MNP LTD Long-Term Debt Solutions in the Vernon office.
