Cardholders advised to plan for a rise in interest rates

By UK CreditCards.com

The prospect of an interest rate rise is becoming more likely, say financial observers. A growing number of experts predict that the Bank of England will increase the base rate in the not-too-distant future. The knock-on effect on people with mortgage or credit card debt could be significant, particularly for those who are already struggling to make their monthly repayments.

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Rate rise 'increasingly likely'
Earlier this month, the Bank of England's Monetary Policy Committee held the official bank rate at 0.5%, despite speculation that high inflation might persuade members to vote for an increase. Speaking ahead of the Bank's announcement, Legal & General economist Tim Drayson suggested that interest rates may rise to 1% "by the summer," while Howard Archer of IHS Global Insight also expects rates to rise later this year. He believes the base rate will reach 1% in the fourth quarter of 2011, "and thereafter [increase] gradually to 2% by the end of 2012."

Preparation 'key' to coping with rate rises
Interest rate rises can be painful for mortgage holders and those with outstanding credit card debts. The shock can be mitigated by ensuring household finances can accommodate an increase in monthly outgoings. However, recent Council of Mortgage Lenders research indicates that many people do not expect the base rate to rise. The organisation's poll of more than 1,500 mortgage holders found that a quarter did not realise interest rates were at a historic low and would be caught off guard by any increase.

Commenting on the research, housing and homelessness charity Shelter warned that 2.8 million homeowners could be unprepared for rising interest rates. Chief executive Campbell Robb pointed out: "It's not just mortgage costs that will be affected. Charges on other debts will rise at the same time, meaning people will have to pay more on other money they owe. This will push those already using credit cards to pay the mortgage each month into even deeper debt." The expert urged consumers to prepare "now" by working out whether they will be affected by rising interest rates and planning for increasing costs.

See related: Credit card interest rates climb higher; Getting to grips with credit card debt

Published: 17 March 2011