Today the Bank of England announced that the UK interest rate will rise to 0.75%, the highest rate since March 2009.
Will consumers struggle?
For the vast majority of consumers this won’t be particularly worrisome, but it does mean that variable rate mortgage repayments will increase and possibly some credit card interest rates. It could be the beginning of a “financial lifetime” of interest rate rises. There is a whole generation of borrowers who have never been subject to a sustained period of rates increases and who have never had to think about, or budget for, material increases in mortgage repayments.
A sustained period of interest rate rises will see a very real impact on thousands of consumers who are already living on a tight budget and who will not be able to absorb increased mortgages repayments and maintain other credit commitments.
How will it affect collections departments?
The impact should not be underestimated. With many organisations only at the beginning of their digital journeys and many with outdated systems infrastructures, additional collectors will be required to handle an increased number of delinquent customers who will require a reduced repayment plan.
Also, spare a thought for those companies that calculate delinquency by dividing the arrears by the monthly repayment amount. By way of example, if arrears are £600 and the monthly repayment is £200, the account is 3 months delinquent. In the event of an interest rate rise the repayment will increase. If that repayment increased to £225 then delinquency age will reduce to 2.66. Issues such as correct credit bureau reporting and changing strategy treatments all need to be considered.
Make sure your collections operation can cope long-term
Since March 2009 the interest rate has not been higher than 0.5%. Whilst today’s rise is modest, it is not beyond the realms of possibility that we could see rates rise to a level that will be unsustainable for many, and that could place your collections operation under severe pressure, especially if you are not a “priority debt”.