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Credit use in Canada is at an all-time high, and it’s all too easy to blame our resulting debts on high interest rates and inflationary pressures.

But Bank of Canada rate changes only affect credit products with variable interest rates. Credit products with fixed interest rates — such as credit cards and personal loans — don’t experience immediate relief when the policy rate decreases.

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Indeed, credit card interest rates typically only change if you miss a payment. Then the annual percentage rate (APR) goes up by as much as five per cent, and it takes a full 12 months of making every payment on time for the rate to drop again.

With higher average credit card balances, consumers are facing increased minimum payment obligations. Coupled with elevated housing costs for both renters and homeowners, many Canadians are struggling to balance purchasing essentials with paying their minimums.

The increased strain on disposable income has led lenders to adopt more cautious credit policies. The result is that qualifying for credit has become more difficult. Lenders are requiring higher down payments or collateral and are approving lower credit limits or smaller loans with stricter terms and conditions.

Here are three reasons why taking proactive steps to manage your debt, rather than waiting for external factors to change and interest rates to go down, will ultimately prove valuable for your long-term financial stability and overall well-being.

Carrying long-term debt has non-financial costs

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Debt can affect every aspect of our lives. The stress and worry about making ends meet can take a toll on our mental health, leading to chronic illnesses such as high blood pressure, headaches, sleep disorders, physical ailments and general malaise.

Financial issues often cause tension in personal relationships, resulting in conflicts and discord between partners, family members, friends and colleagues. Debt can also impact your career, forcing you to stay in a higher-paying but less satisfying job. It can limit opportunities for professional growth, such as starting a business or becoming a consultant.

In addition, debt can diminish your quality of life by restricting your ability to travel, participate in family activities, pursue hobbies or enjoy a lifestyle similar to your peers. In an attempt to alleviate the non-financial burden of debt, some may try to spend their way to an improved quality of life, which, unfortunately, often leads to a cycle of more debt, stress and anxiety.

Long-term financial goals are impacted by debt

Debt comes with an opportunity cost, which means you miss out on potential benefits when you choose one option over another. In the context of debt, money spent on repaying debt diverts funds from potential investments and the chance to earn compound interest, where the interest on your investment also earns interest. This compounding effect can lead to substantial investment growth over time.

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For investments such as registered education savings plans (RESPs), which are partially eligible for government grants, or matching benefits from an employer-sponsored registered retirement savings plan (RRSP), you miss out on free money that can also compound and grow your savings even more.

By focusing on debt repayment, this lost opportunity for investment growth can significantly reduce your savings. It means you may not be able to help your kids with post-secondary education costs as much as you’d like. You may need to delay retirement or work part time well into your golden years. Or it may not be possible to leave a financial legacy for your children and grandchildren.

Debt is like a time thief. Addressing it as soon as possible and creating a plan to manage and reduce it will improve your ability to work towards your goals.

Debt limits your control over your money

In the current credit climate, dedicating a significant portion of your income to debt payments can severely limit your financial control. High interest rates and payments can leave you feeling at the mercy of your debt. Your credit utilization ratio and payment history impact your credit score, potentially making future borrowing more difficult or costly.

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Existing debt can also restrict your ability to take advantage of other opportunities, such as investing or furthering your education to advance your career. The constant stress of managing payments can impair your decision-making and lead to poor financial choices. If you fall far enough behind, creditors and the courts may ultimately decide how your paycheques are allocated.

It’s essential to take proactive steps to regain control of your finances in order to avoid the dire financial consequences of debt. No one can predict when interest rates will significantly decrease or if they’ll ever return to the historic lows seen before the pandemic.

Using one form of credit, such as a home equity line of credit, to pay off another, like credit cards, only delays the inevitable. Instead, a better approach is to create an emergency budget, choose a debt-repayment strategy, set realistic goals to track your progress and seek help if needed to restore your peace of mind and financial stability.

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 27 years.

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