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The Bank of England and personal debt: what's the link?

By Matthew Plant

7 June2021

Bank of England Today at noon, the Bank of England published its latest decision on the base rate - it decided to leave it unchanged yet again. Unless you're the kind of person who follows the financial news, you might not know what that actually means, but if you're in debt, have a mortgage and/or have money in the bank, a change in the base rate could make a real difference to your finances.

In a nutshell, the base rate affects the 'cost' of money, as it affects how cheaply lenders can borrow. In general, when it's high, borrowing is more expensive - and saving is better rewarded. When it's low, borrowing is cheaper - and saving is less rewarded.

Right now, the base rate has been all the way down at 0.5% since March 2009. Experts are predicting that it won't rise for a long time, and there's even talk of it dropping further.

That's why savers across the country are worried that they're seeing very little interest adding to their savings.

But it's not always so straightforward. The base rate isn't the only thing that affects the costs that lenders have to pay, and the link between the base rate and the overall costs they face isn't as close as it used to be.

So the average overdraft interest rate has risen from 18.95% to 19.52% over the last two years - and the average credit card rate has risen from 16.51% to 17.31%.

One place where there's a clearer link between debt and the base rate is in tracker mortgages. These mortgages actually track the base rate, so when it goes down, they go down. To give an example of what that means for people with mortgage debts, the Consumer Credit Counselling Service (CCCS) reports that fewer young homeowners (in their 20s) are calling them for help - between 2009 and 2011, the number fell by 33%.

When it comes to renters, it's a different story - in 2011, over 10,000 people asked the charity for help with their rent arrears, which marks a 27% rise in just one year.

Image iStockPhotos / stockcam

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Tags: base rate, Bank of England, debt, interest rates, overdraft, Consumer Credit Counselling Service, CCCS, rent

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