How to cope with a rising interest rate
By Marianne Curphey
The Bank of England increased interest rates in the UK from 0.25% to 0.5% on 2 November. It's the first interest rate rise in more than a decade, and although it is a relatively small increase, it could adversely affect people with home loans and credit card debt.
An October 2017 survey by the Financial Conduct Authority (FCA) found that half of the UK population is already financially vulnerable. Around one in six people would find it hard to cope with a £50 monthly increase in bills. The FCA found that 4.1 million people are already in serious financial difficulty, with those in the 25- to 34-year-old age group struggling with the most debt.
This interest rate rise by the Bank of England could be followed by further increases, so experts say acting now could help ward off financial difficulties in the future.
Stress test your finances
Caroline Hamilton, debt expert at the Money Advice Service, says you should take a holistic view of your finances and work out where your costs might increase.
"Think about what you owe, and how and when that debt is affected by an interest rate rise," she says. "For example, if you are on a fixed rate mortgage deal, then you may not be affected until you renew."
When it comes to personal loans, the interest rate is usually set for the duration of the loan. By contrast, credit card companies can increase interest.
"Credit card companies can change their interest rates, but they must give you 60 days' notice," Hamilton says. "They need to allow you to pay off the balance and reject the interest rate rise if you wish - this is following a recent change in regulations."
Once you know what your current borrowing costs are, and whether they are likely to rise in the short- to medium-term, you can start to plan for the future.
"You can start to stress test your finances," Hamilton says. "Look at your monthly outgoings - can you still afford to pay your bills and outgoings and any outstanding debt?"
hesitate to act
Once you know what you need to change, put a plan in place - and start implementing it.
"You don't want to sleepwalk into a situation where your cost of living has crept up and exceeded your income," Hamilton says. "We find that people are slow to react when something changes and there is a lag between something happening and realising that it has had an effect."
If you fail to act quickly, you could be storing up bigger problems.
"Think about what steps you can take now," Hamilton says. "For most people, an interest rate rise means costs will go up, so they might need to make a reduction in their expenditure."
If you know that you have borrowing that will be affected by interest rates, take preventive action - perhaps by using some savings to pay off your borrowing.
If you don't have a backup plan, seek help sooner rather than later.
"Go and get debt advice at the first sign of difficulty rather than allowing problems to build up," Hamilton says. "You can go for help even if you are not actually in debt. It is a good idea to take precautions now."
should your plan entail?
1. Tackle debt.
Hamilton says the standard advice is to pay off the most expensive debt first, but with interest rates on the rise, it is good to build some flexibility into that model.
"When you do your scenario planning, you may realise that the cheapest debt right now is going to get much more expensive in the future," she says. Say you have a card that offered 0% interest for 12 months, and you have three more months left on the promotional rate but the balance is still high. In a few months, the card could revert to a very high rate.
"It might be a good idea to start to pay that off now while you can," Hamilton says.
Another useful exercise is to look at where your money is going and assess what benefit you are getting from it.
"Do you need to be paying direct debits for subscriptions and gym memberships that you don't use?" Hamilton says. "If you have not shopped around recently for utilities and insurance, then do so and use any savings to pay off your debt a bit more quickly."
Draw up a spending plan.
Philip Pearson, independent financial adviser at P&P Invest, says that if rates do rise, people who are borrowing on variable rates "will see an increase in cost and this will reduce your disposable income."
Be honest with yourself about how much debt you owe, and what you can afford to pay back, Pearson says.
"You need to write down exactly what you owe, and to whom, to understand where you are," he says. "This forces you to take notice of what debts you have that are outstanding and how much you are paying on them."
Then, you need to draw up a stricter budget to keep you from falling in a debt hole.
He suggests using cash to pay for everyday items, such as groceries, clothing and transport. "That is the most effective way of budgeting because it focuses the mind."
And once you have your budget, stick to it.
"You might need to keep a spending diary," Pearson says. "Record each transaction that you make, even small items, such as your morning coffee and newspaper," plus your direct debits and credit card spending.
Making positive and careful choices about how you spend money and where you can make savings gives you more control over your finances and the confidence to manage your money more effectively in the future - even if rates rise again.
Updated: 1 November 2017
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