Understanding and Maximizing your use of Low Interest Credit

Understanding and Maximizing your use of Low Interest Credit

Low interest credit is reaching a critical mass of contributing to consumer debt in the Canadian economy. Whether by using credit cards, lines of credit or acquiring a low interest percentage for your mortgage, low interest rates continue to leave their mark on how consumers spend and save their incomes.

 

According to figures recently published in an RBC business report[i], Canadians currently carry an outstanding national household credit debt of $1.948 trillion dollars as of June 2016. 69.2% [ii] of households retained debt between the years 2012–2014 while 70% did so in 2015. 30% [iii] of households continue to hold both consumer debt and mortgage debt.

 

Using more money than we own is becoming an issue even in the housing sector where variable mortgage rates are at an all-time low, from 6.00% in 2006 to 2.70% this year (2016), while fixed rates decreased from 6.63% to 4.66% respectively [iv], encouraging starter homes prices to swell into the $500,000s in the Greater Toronto Area.

 

These statistics, along with a 165.3% (or $1 earned per $1.65 owed) debt-to-income ratio[v] are symptoms of a larger problem.

 

What’s enticing us to take on more than we earn?

Part of our reliance on debt can be credited to an increase of Canadian banks’ actively lending, and consumers seeking, long term and low interest loans of all types: from a line of credit to finance a large purchase, to auto loans that tend to go into negative equity when a newer model is purchased using equity of an older car. Of this overall debt, a $21,580 average can be attributed to each Canadian with $19,896 going towards auto loans and $3,925 in credit card debt [vi].

 

While running away from debt isn’t possible for most Canadians, making the most of your loans likely is.

 

Here are a couple actions you can take today to begin capitalizing on low interest.

 

Consider a balance transfer of a high-interest card to a low-interest card, if you qualify for one.

 

  • For example, say you have a Visa credit card holding an $8,000 balance at 21.99% interest, you may wish to take out a line of credit for 60% of the amount and pay 40% upfront.
  • After lowering your interest rate, you can service savings you accumulate toward paying back your of line of credit, saving money in the process.
  • If you don’t have access to a low-interest card or line of credit, you may still be able to negotiate a balance transfer at 0% for the first six months with your bank. Additionally, a consolidation loan can help you in this regard.

Whether you decide to refinance your home or get a new credit card, low rates can encourage buyers to become wiser when it comes to making expensive purchases while they remain low. Staying informed about your finances is the key to smart consuming.

 

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Sources

[i] RBC Economics, Canada Credit (August 2016): http://www.rbc.com/economics/economic-reports/pdf/other-reports/Pulse%20of%20HH%20Finances.pdf

[ii] Bank of Canada Financial System Review, December 2015, Table 1: http://www.bankofcanada.ca/wp-content/uploads/2015/12/fsr-december2015-cateau.pdf

[iii] Ibid, Table 1

[iv] Mortgage Rate History — Super Brokers: https://www.superbrokers.ca/tools/mortgage-rate-history/

[v] Statistics Canada “Latest Statistics” — August 25, 2016: http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/media01-eng.htm

[vi] TransUnion Q2 2016 report: http://www.transunioninsights.ca/IIR/

 

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A Maryland native and Toronto-area transplant/graduate of the University of Toronto, Christine is a content writer at Loanerr. When not writing articles, she's an avid swimmer, cat lover, violinist in a indie band, and a humble food aficionada.