The Impact of Rising Interest Rates on UK Debt: What You Need to Know

As interest rates continue to rise in the UK, many households are feeling the pressure of increased borrowing costs. For those already managing debt, these changes can be particularly challenging, affecting everything from credit card repayments to mortgage affordability.

In this blog, we’ll explore the implications of rising interest rates on personal debt, why rates are increasing, and practical steps you can take to stay in control of your finances.

Why Are Interest Rates Rising?

The Bank of England raises interest rates to combat inflation—when the cost of goods and services rises too quickly. While this move is intended to stabilise the economy, it often has a knock-on effect on household budgets. Higher interest rates increase the cost of borrowing, making loans, mortgages, and credit cards more expensive.

How Rising Interest Rates Affect Personal Debt

1. Higher Mortgage Payments

• If you’re on a variable or tracker mortgage, your monthly payments will increase as interest rates rise.

• Even fixed-rate mortgage holders face higher costs when their current deal ends, as new deals are now more expensive.

2. Credit Card and Loan Costs

• Most credit cards have variable interest rates, which means you’ll pay more in interest if you carry a balance.

• Personal loans taken out on variable terms will also see higher monthly repayments.

3. Impact on Debt Repayment Plans

• For those in debt management plans (DMPs), higher interest rates might make it harder for creditors to agree to freeze or lower interest charges.

4. Savings vs Debt

• While higher interest rates benefit savers, they can exacerbate financial challenges for those with debt, as the gap between savings growth and debt repayment widens.

Who Is Most Affected?

Households with high levels of unsecured debt, such as credit cards, personal loans, and overdrafts, are hit hardest by rising interest rates. Young people and renters, who often rely on credit to cover living expenses, are particularly vulnerable.

A recent study revealed that nearly 25% of UK households are struggling to meet monthly debt obligations, a figure expected to rise as interest rates increase further.

Practical Tips for Managing Debt in a High-Interest Environment

If rising interest rates are affecting your ability to manage debt, here are some steps you can take:

1. Review Your Budget

• Assess your income and expenses to identify areas where you can cut back.

• Prioritise essential costs like housing, utilities, and food.

2. Switch to a Fixed-Rate Mortgage

• If you’re on a variable mortgage, consider locking in a fixed-rate deal to shield yourself from future rate increases.

3. Pay Down High-Interest Debt First

• Focus on repaying debts with the highest interest rates, such as credit cards, to reduce the financial burden.

4. Consolidate Debt

• Explore consolidating multiple debts into a single loan with a lower interest rate, simplifying repayments and potentially saving money.

5. Seek Professional Help

• If you’re overwhelmed, consider speaking to a debt adviser. Organisations like StepChange or National Debtline offer free, confidential advice.

How to Stay Resilient

Navigating rising interest rates requires careful planning and a proactive approach to managing your finances. Here are some additional strategies:

• Build an Emergency Fund: Save a small amount each month to cover unexpected expenses.

• Avoid New Debt: Limit new borrowing where possible to prevent further strain on your finances.

• Communicate with Creditors: If you’re struggling, reach out to your creditors. Many are willing to negotiate repayment terms.

Final Thoughts

Rising interest rates are challenging for many UK households, but with the right approach, you can take steps to minimise their impact. The key is to stay informed, seek help early if needed, and make proactive adjustments to your financial habits.