When people talk about interest rates, they often talk about “cycles”. That is because central banks, like the South African Reserve Bank (SARB), tend to move rates only in one direction – up or down – for extended periods.
At the moment, rates are heading up. After cutting rates to very low levels during Covid, the SARB is now on the move the other way, and likely to keep raising rates for most of this year.
That is because one of the SARB’s most important roles is to manage inflation. And with inflation rising, lifting interest rates is seen as an important way of keeping it in check.
Importantly, this will have knock-on effects, and these will impact people in many ways. Here are five of the most significant:
Not all the effects of higher interest rates are negative for consumers. The interest you can earn on bank deposits, money market accounts and money market funds is also going to move higher.
This makes these more attractive as short-term savings vehicles. This could be a good time to make sure that you have enough put away in your emergency savings account, and benefit as you get paid more for having your money in a safe place.
The interest rate you are charged by your bank is based on the SARB’s interest rate. That means that your monthly repayments will go up as the Reserve Bank adjusts.
However, even though rates are rising, they are still low for now. And if you have already paid back a decent amount of your home loan, that means you may be able to refinance your mortgage at a lower rate. This is a good way to mitigate some of the impact of rising rates and could save you a lot of money.
Just like with your home loan, repayments on your car loan will go up. And, in the same way, you could also think about refinancing this debt.
However, when refinancing any loan it is important to weigh up the costs and benefits. There may be penalties, and additional fees, and if the period of the loan changes, you may even end up paying more in the long run. Consider your options carefully and get good advice.
The interest rate on your credit card is going to go up too. It’s never a good idea to carry much credit card debt, because the interest rates charged on these products are always amongst the highest that banks levy.
So, as interest rates go up, it becomes even more beneficial to clear your credit card every month. That way you don’t have to pay any interest at all.
Although higher interest rates don’t in and of themselves have any impact on your credit score, if you miss payments because of them, you need to think about the longer-term impact.
Missing even one month of a loan repayment will affect your score for years. This could make it much harder to access debt in future, so always try to be proactive. If you realise you can’t afford a payment, let the creditor know beforehand so that you can agree on how to manage things.
To talk about the impact of rising rates on your particular circumstances, speak to a professional.
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