Interest rates have been rock bottom for a while now, but the situation is about to change. According to the Financial Post, the Bank of Canada could soon raise rates to tackle inflationary pressure. If you have accumulated a lot of debt, an increase in rates will make it much more difficult to manage your payments. In fact, a high inflation scenario is much better for people with a huge pile of debt, because when the real value of the currency goes down, your debt repayments will also seem smaller.
Even when the rates go up, there are some options that you can explore to manage you debt. Here are two highly effective solutions that you can use to deal with debt:
- Debt consolidation – The simplest and the most popular way of managing high interest debts is to consolidate them into a single low interest loan. For example, you can opt for a home equity loan to consolidate your credit card debts. A home equity loan comes at a much lower rate than what you are paying on your credit card. This is because your house is used as collateral for such a loan.
- Snowball strategy – In snowball strategy, you need to make a list of your debts in increasing order of outstanding amount. Start with the first debt as it is the easiest to tackle. This is your target debt. Use your monthly cash inflow to pay the minimum amount on all debts and then use the balance to reduce the target. Do this until you have fully repaid your target debt and then make the next debt in the list your new target. This strategy will help you remain focused on repaying your debts and will make debt management much easier.
