T'is the season for higher line of credit interest payments
Nothing feels like the holidays more than higher line of credit interest payments — not!
The Bank of Canada has raised rates five times since mid-2017. Banks in Canada have followed suit and nudged up their rates, naturally, because these are tied to the Bank of Canada’s key lending rate.
The unfortunate financial reality this holiday season is that it’s gotten more expensive to carry a balance on your line of credit because of rising rates, which have not been isolated just to new homebuyers seeking mortgages.
I’m calling out lines of credit in this article specifically because they have become an incredibly popular borrowing tool for Canadians over the past two decades. This is because lines of credit are flexible, you can pay them off at your leisure and borrow whatever your want so long as it stays within your allowable limit and you cover the monthly interest payments.
The problem for Canadians is that those monthly interest payments are climbing higher and higher, and in many cases, have doubled in 18 months. So, if you happen to be in the uncomfortable position of having a tight monthly budget, these interest payments could be pushing your budget over the top.
I know you’re likely focused on holiday parties right now, but if this is you, here’s what you can do about it.
Find room in your budget to make larger payments to the balance
I know this is easier said than done, but think about ways to reduce other expenses to make room for a higher payment towards your line of credit balance. Could you cut back on your dogwalker and cancel your subscription to cable television? The faster you pay down the balance the less interest you pay. That’s because the interest charges are based on the balance owing. So as that decreases, so will the interest payments.
Sell things you own and make a lump-sum payment
It’s amazing the things we collect in our homes, closets, garages and storage lockers — skates, lawnmowers, hoses, shoes, Christmas trees, cars, scooters, strollers, toys and more. So if you’re carrying a balance on your line of credit, you might want to sell the things you don’t really need. Then, take this money and make a lump-sum payment on your line of credit.
Not sure where to start? Take an inventory of what you could do without, snap some attractive-looking photos and post on your favourite second-hand website, such as Kijiji. Just watch out for scammers and never give away your banking information.
If your line of credit is unsecured, secure it
Lines of credit are either secured against an asset, such as a home or a car, or nothing at all, making them unsecured. The first is safer for the lender because if you default, they can take your asset away. That’s why secured lines of credit have lower interest rates. Unsecured lines of credit are generally offered at a much higher rate.
So, if your lender can make the option of a secured line of credit available to you, and if it is indeed at a lower rate, take them up on it.
Look for a lower rate
This can also be applied to all higher interest rate loans and balances. When you bundle them together, they can typically be consolidated into one payment at a lower interest rate. Hunt around for lower rates for lines of credit, and if you own a home, it might make sense to roll your debts into your mortgage so long as there aren’t hefty fees to do so.
Sometimes you need a line of credit to help you through a rough patch, to fund a renovation, to pay for school or to cover your holiday gift budget (a bad idea by the way). But, if over time you find that the balance of your line of credit is going up and not down, you have a spending problem and need to cut back. Why not make that your New Year’s Resolution — to crush your line of credit balance, and those pesky interest payments.