Ditch the debt

Recent interest rate hikes makes it the ideal time to reassess your debt

As a result of increasing interest rates debt is becoming more expensive. While the difference may be small at the moment, any additional interest rate increases will start to really hurt your pocket. Now is the perfect time to ditch that debt.

“For the last five years interest rates have been at an all time low, meaning that the cost of debt has been reasonably low for this period of time,” says Eunice Sibiya, Head of Consumer Education at FNB. “But, recently the interest rate rose by 0.5 percent, and it seems that we are now entering an upward rate cycle, this means we could see more interest rate rises in the near future. Borrowers can take steps to protect themselves from rate hikes.”

As interest rates rise, so does the cost of borrowing.

“Any money that you have borrowed from a financial institution will go up, this includes car repayments, bond repayments as well as credit cards, personal loans, any furniture or items bought on higher purchase and store cards,” says Sibiya.

For example, a 0.5% increase in interest rates on basic debt of a credit card of R10 000, a store card of R10 000, car repayments on a R200 000 car and a bond of R500 000 (see table of assumptions below), a consumer is looking at R3 600 extra a year to repay his or her debt.

“The fact is that interest rates don’t tend to stop at one increase. The best thing to do is to start cutting down on your debt as soon as possible, so that these and any future increases don’t hit your pocket,” says Sibiya

Firstly, you need to understand what your debt is costing you.

“Many people don’t even know what interest rates they are paying,” says Sibiya. “Go through all of your accounts and find out which ones are attracting the highest interest rate. Usually this will be your store cards, credit cards and personal loans.”

You will need to find out if there is space to cut down on your spending and in order to reduce your debt. Obviously the bigger items, like your car loan or your bond will be difficult to clear, so focus on the debts that have high interest first.

“This may seem like a big task now, but just understand that if you are finding it difficult to cut down now imagine what you will be feeling like if interest rates go up again, you will have even less to allocate to reducing your debt,” says Sibiya.

Once you have cleared a debt, not only will you be able to save a bit more, but also you won’t be hit by any future rate hikes.

“Be careful of taking on more debt, especially now,” warns Sibiya. “If you really need to purchase something that requires debt, add an additional 2 percent onto the repayments and work out if you will still be able to afford it. If you can’t, decide if you really need that purchase right now.”

It isn’t all doom and gloom.

“The good thing is that, whenever interest rates go up, interest on your savings or investments goes up too, so start putting more money away,” concludes Sibiya.