With the cost of living and interest rates rising, you’ll be wondering how this affects any debt you have. Inflation drives up household costs, so to slow inflation, the South African Reserve Bank (SARB) may raise interest rates. This will increase your monthly debt payments and how you manage the added expense could affect your credit score.

Household budgets were under extreme pressure in 2022, with annual inflation climbing from 5.7% at the beginning of January to 8.05% by the end of July and still at 7.2% by December. In response, SARB increased the prime interest rate 6 times in a row in 2022, and again at its first 2 meetings of 2023. SARB raises interest rates to slow consumer spending, which should bring down inflation.

This is a bitter pill for households already under pressure. But how, you might ask, does higher inflation impact your credit score?
 

How inflation impacts household budgets

First, let's look at how inflation hurts your budget. Inflation raises the price of everything from fuel to food, so your household expenses increase. The prime interest rate increases along with the repo rate, so it has risen regularly since November 2021. Hikes in the prime rate increase your payments on any debt with a variable interest rate, putting even more pressure on your budget.

On 31 March 2023 the repo rate was adjusted to 7.75%, pushing the prime interest rate to 11.25%. If you took on debt when the repo rate was at record low levels (3.5%) in 2020/2021 and prime was at 7%, by now you would have seen significant increases in the monthly costs on a home loan, credit card or vehicle finance.

For example, if you’re paying off a home loan, you’ve probably seen the biggest increase in monthly payments. If you owe R1 million on a bond over 15 years that you took out in 2021 at an interest rate of 7%, and that rate is now at 11.25%, your repayments will have risen by more than R2,500 a month. Similarly, payments on credit card debt of R15,000 may have increased by around R60 a month, and payments on vehicle finance of R200,000 could have risen by more than R400 a month.

Luckily, personal loans generally come with fixed interest rates, so your payments on those shouldn’t be affected by rising repo rates. However, your payments on store credit cards or other credit agreements with variable interest rates will also have increased. The lesson to take from these examples is that inflation can increase the pressure on your budget in the blink of an eye. In little more than a year, you might see your monthly debt repayments rise by R3,000 or more.
 

But how can inflation affect my credit score?

To be clear: inflation has no direct effect on your credit score. Credit bureaus don’t adjust everyone’s credit scores according to inflation rate fluctuations.

But indirectly, inflation can reduce your credit affordability – which depends on the amount you owe in credit payments every month as a percentage of your disposable income. If inflation causes interest rate increases that push up your monthly payments, you obviously have a smaller amount left over. Should you need more credit in the future, the amount considered affordable will be smaller than it was before the rates went up, even if your credit score remains unchanged.

The biggest indirect danger that inflation poses to your credit score, however, is the potential for missing payments. If you don’t adjust your budget and your financial planning every time there’s an interest rate hike, the monthly payments on all your debt may get to a point where they exceed your disposable income. Missing a payment on any form of credit is the most common cause of damage to people’s credit scores. Not only can a missed payment result in cost penalties, but it’s an immediate red flag to credit bureaus that you aren’t managing debt responsibly.
 

How to protect your credit score when you’re struggling

If you’re finding it increasingly difficult to keep up with your payments after every rate increase, talk to your credit provider about a solution. They may be able to restructure your debt over a longer term, so that your monthly payments are reduced. Staying in debt a bit longer and paying more in interest is a better solution, from a credit-score perspective, than missing a payment.

Another solution is to apply for a consolidation loan. This is a personal loan that you can use to pay off your other short-term debt. You then have only one loan amount to pay every month, with one set of bank charges. If your consolidation loan is over a longer term or has a lower interest rate than the average rate on all the accounts you pay off, your total monthly payment should also decrease, giving you some relief from inflation. And since a personal loan has a fixed interest rate, your repayment amounts won’t change over the rest of the loan term, no matter where SARB sets the repo rate.

It’s common for those who aren’t financial experts to see issues like the repo rate and shifts in inflation as mysteries that only those in high finance can follow. But it’s not that difficult to understand the basics of how these factors interact, and how they will affect interest rates. Look over all your regular debt payments on your bank statements for the past 2 years, and you’ll quickly become aware of how much more you’re spending.

It’s easier to invest time in reviewing and adjusting your budget every month with the help of My Smart Money, a feature on digital banking by Nedbank that allows you to track your spending, budget and savings anytime online with free accounting tools like MoneyTracker. Once you know exactly how much more you’re spending on debt, you’ll know how much you need to cut from your non-essential spending to keep your credit score healthy.