The Bank of England has raised interest rates by 0.25%. Those struggling to pay their credit card debt may be wondering how will this affect your finances. We've run some numbers for various balances and scenarios in the case of future interest rate increases, to help you understand the potential impact to you.
- How Will the 0.25% Interest Rate Rise Affect my Credit Card Payments?
- What Happens if Rates Continue to Rise?
- What Should You Do Next?
Impact of Interest Rate Rise on Credit Card Payments
Credit cards are usually quick to raise interest rates in line with the Bank of England. Due to a 0.25% interest rate rise, an extra £18 would be owed on a £1,000 credit card balance at 19% APR, assuming the cardholder only pays the minimum payment each month (estimated at 2.5% of the balance).
|Outstanding Balance||Additional Interest Charges Due to 0.25% Rate Rise|
Those who pay back their full balance on time each month won't be affected by the interest rate rise.
What Happens if Rates Continue to Rise?
If the Bank of England continues to raise rates, the impact to future interest payments will be even more significant. The following table shows how much additional interest you'd owe due to a rate rise of 0.5%, 1% or 1.5% from a starting APR of 19%, for a variety of starting credit card balances.
|Starting Balance||APR rise of 0.5%||APR rise of 1%||APR rise of 1.5%|
Credit card debt is generally expensive, especially if you're on a credit builder card (as they charge higher-than-average interest rates due to the higher expected risk of offering credit to someone with a worse credit rating). If you're carrying credit card balances from month to month, there are a few steps you can take to reduce your debt burden:
- Consider moving existing credit card balances to a 0% balance transfer credit card
- Temporarily reduce any non-essential expenditures (if you have any) to save money for paying down credit card balances
- Consider taking out a personal loan to pay off your credit card balance (but only strong credit ratings will get the lowest interest rates)