At some point or the other we all have to deal with APRs. In some cases we deal with them for the majority of our lives but for most of us rather than lending more than we borrow, we end up borrowing more than we lend or save. In some cases we never even have enough to save but borrow for longer periods of time.
For this reason alone interest rates(APRs) are very important to us. We must know the type of interest we are on, if they rise, how they rise, how we can lower them and what they actually cost us daily, monthly, yearly and throughout the life of the credit product that we have.
We must also be sure we are ready for any interest rate rises and be aware of the consequences of missing repayments on our credit facilities.
Most of us will have a mortgage, savings account, pension or a credit card and with any of these products we can easily find ourselves in debt or even worse losing our house or other possessions through bankruptcy.
So how are interest rates set?😮
The first thing to know is that most interest rates will be influenced by the Bank of England. This is because most high street lenders borrow money from the Bank of England before adding their own markups to the rates they offer the end consumer.
This means if the Bank of England's base rate rises we will likely see a rise in rates from high street banks on their different credit products such as loans, mortgages, credit cards etc.
The interest rates are set by the monetary policy committee who meet every month to decide if the interest rates offered by the Bank of England should rise, fall or stay the same.
Interest rates don't rise too often but being proactive about it will prevent you getting caught out by any huge rise or fall in interest rates.(Yes, a fall could still influence you if you have lots of savings which you use to generate interest. E.g A pension for retirement)
Steps to take to ensure you are prepared for an interest rate rise 🙌🏻
Boost your credit score✔
It is as straightforward as it sounds. A better credit score makes you more eligible to cheaper products. This means if you already have existing credit you could simply refinance these credit products for cheaper ones if you have a better credit score since the time you took out the initial credit facility. Boosting your credit score doesn't require too much work on your part. The first thing you need to do is find out what your credit score is then follow a step by step list on how to build credit. You can see your free credit score via huuti.
Find out what your monthly disposable income is✔
Without knowing how much you have left it's hard to know if you will be able to afford any interest rate rise which boosts up your monthly credit repayments.
By knowing how much you have left after you have spent on your basic lifestyle and committed expenses then you will know what room you have left to cater for any rise in your monthly repayments e.g a rise in your mortgage repayment.
Know your credit product✔
You need to know what type of credit product you are on and what the terms are. Without this information you cannot adequately plan for any rise in rates.
Example: A mortgage could be fixed rate(which means a rise in interest rate will not affect you), Variable rate( which means a rise in interest rates will affect you as your monthly repayments will go up) or a discounted rate( which means although your rates will go up you are still receiving a discount on the lenders standard variable rate) or a capped rate( where your rates can only go up to a certain maximum).
In short, to prepare for an interest rate rise you must be well informed.
Consider debt advice✔
If you discover you don't have any disposable income to cover any future rise in your monthly credit repayments then you should consider getting free debt advice so you can put yourself in the best position to financially survive if you cannot make any repayments.
Make sure you are on the best credit deal✔
The easiest way to prepare for an interest rate rise is to already be on the best deal possible.
At Huuti we monitor all your credit commitments to ensure you are on the best deal possible when considering mortgages, credit cards etc. This means you are never paying more than you need to.
Estimate the cost of an interest rate rise✔
To be fully prepared for a possible interest rate rise you should estimate what an interest rate rise will cost you per month. So if your mortgage rates rose by 0.25% what will this cost you in extra repayments per month. You can use our interest rate rise calculator to simulate this.
Interest rate rises could affect our finances in so many ways. It is better to be prepared for them than be surprised
Interest rates rise when borrowing👀
When borrowing most unsecured credit products will have interest rates which don't rise as per the agreement you have with the lender. Although credit cards and overdraft providers could raise their rates, they will have to inform you prior and you can cancel your credit card and repay all you owe on your credit card within 60 days. For overdrafts its a little bit complicated as the debt already exists. You will likely need to clear your overdraft before the new rates come into effect.
Secured credit products may see rise in rates in line with your agreement with the lender.
Mortgages with rates other than fixed rates will usually be prone to rates being risen at any moment and you could lose your home or possessions through bankruptcies or county court judgements if you don't keep up with your monthly repayments.
Interest rates rise when saving😋
If you are saving and interest rates rise then you are lucky as you don't need to do much. Just watch to see which lender or savings account offers the best rates and then switch to that provider if you don’t incur any fees for switching or if you feel the overall value gained from switching outweighs any fees involved with the switch.
Interest rate rise when saving a pension🔏
Unfortunately if you have an annuity which is linked to gilt yields you are already locked in to the rate which you had when you signed up and you won’t benefit from the new rates but if you are about to open a pension then an interest rate rise is great news.
As annuities rates are link to gilt yields and pay a guaranteed income for life. This means you will get a good rate of return for life from the rate on the day which your purchased your annuity(subject to indexing etc) although if interest rates rise beyond the rate which you receive you will not benefit from this.