Given the uncertain economic times we’re in now, many Canadians are focused more than ever on reducing debt and building up a rainy day fund that may have been depleted of late. Of course, deciding between the two can be a difficult decision for many.
For most individuals, credit cards are the highest interest rate debt on one’s books. Most credit cards now charge annual interest rates in the 20% range.
Making the minimum payment on these cards thus can result in years of debt accumulation, a particularly difficult situation for those with lower incomes due to the pandemic this past year.
In the U.S., credit card balances fell by the most in history last year. This credit card debt reduction was fueled by an increase in mortgage re-financings, which allowed for the consolidation of high interest debt such as credit cards. Canadians typically are slower to refinance their homes to pay down debt.
However, with mortgage rates where they are today relative to credit card interest rates, such moves could be beneficial over the long term for those bullish on the long-term strength of the Canadian housing market.
For those who own a home and have room to consolidate debt via a home equity line of credit, such a move could have its advantages. These equity lines tend to have interest rates approximating those of the underlying mortgage, and offer more flexibility in terms of paying them down over time.
Invest wisely, my friends.
