Interest rates to rise again next month – act now or risk debt wipeout

Bank rate now stands at three percent and markets are pricing a string of increases over the winter months to a peak of 5.25 percent. This would have seemed impossible just a year ago.

Credit card APRs decoupled from bank rate long ago, averaging 22 percent before today’s BoE meeting. Now they could rise even higher.

Anyone with an overdraft is already paying up to 40 per cent. Personal loan rates will also rise, as borrowers are slammed at every turn.

It’s time to draw up a survival plan.

Start by finding out exactly where you stand: how much you owe, the interest rate you pay and whether you are free to switch lender without penalty.

Most mortgages allow you to overpay by up to 10 percent a year with no penalties (but always check).

If you have any spare cash shrinking your mortgage would be a good way to use it. Savings accounts now pay more interest but borrowing money is always more expensive.

If you are stuck on your mortgage lender’s standard variable rate, see if it offers a cheaper deal in its range, and compare rivals, too. Get advice from an independent whole-of-market mortgage broker.

Homeowners face a tough choice between locking into a fixed rate or choosing a floating, variable rate.

Both have downsides. Fixed rates cost more today but will protect you from future BoE rate rises.

Variable rates are cheaper but will rise, probably after the BoE’s next base rate decision on December 15. However, if interest rates do peak by the summer, you will be free to look for a cheaper deal.

There is no right or wrong, the answer is down to you.

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If you have expensive short-term debt such as a credit card or overdraft, focus on paying that down first as it will charge much more than any mortgage.

When it’s under control, target your most expensive debt, then work your way down the list, a process called “snowballing”.

Remember to make minimum monthly payments across all of your borrowings, to protect your credit score and avoid the bailiffs.

Another option is to shift existing credit card debt onto a balance transfer card, which gives you breathing space by charging zero interest for an introductory period.

Many charge a transfer fee of around three percent, but usually it’s a price worth paying.

Sainsbury’s Bank offers a zero percent balance transfer rate for a market-leading 34 months, with a transfer fee of 3.88 percent.

Otherwise Sainsbury’s offers a shorter introductory zero interest period of 22 months with no fee.

If you qualify for one of these cards, make sure you pay down that debt before the introductory period ends.

Those struggling to pay off debt or to meet minimum payments should contact their bank or card issuer as soon as possible.

It may pause fees or help you to set up an affordable monthly payment amount.

If in serious debt, get free support form charities such as Citizens Advice, StepChange or National Debtline. Avoid scammers who charge for debt repayment plans.

Good luck!