Will the interest rate drop make any difference at all?
Interest rates have been shaved – but that might not be enough to dig into the debt mountain

At first glance, a rate cut of just 0.25 per cent does not seem much – but for some people, the Bank of England’s decision could make the difference between drowning in a sea of debt and keeping their heads above water.

Assuming that mortgage lenders pass on the full reduction – as some of the major lenders are doing – a person with a £100,000, interest-only, 25-year house loan will have to find around £20 less a month – double that if their mortgage is £200,000. This could be enough to prevent thousands of people defaulting and even having their homes repossessed.

But for the rest of us, the first Base Rate cut in two years is going to mean little in terms of our borrowings.

Good news, bad news

The good news of a modest cut will be outweighed by further bad news. The inter-bank lending rate – the amount of interest banks charge each other for loans – is substantially higher than the Bank of England rate and has been for almost all of 2007.

That means people whose fixed-rate mortgage terms are coming to an end are going to face paying much higher interest. They are going to have to look hard to find a new bargain.

And those with debts outstanding on their credit cards, which usually charge much more interest than mortgages, are going to find it tough going, too. Credit card lenders are becoming stricter about who they will allow a card and whether they will permit balance transfers at beneficial rates. Many more credit applicants are being turned down than in recent years.

Finding the key

The key to getting a good loan deal – whether you need a mortgage, credit card or other loan – is to have a good credit report. Your credit report, which lists your financial history, shows where you’ve been granted and applied for credit and how well you have managed your repayments. Your credit history is a major factor in the decision whether to offer you a loan and on what terms – including the interest rate charged.

You should check your credit report to ensure that everything in it is completely up to date and accurately reflects your circumstances. To see what lenders see, you can take a free 30-day trial of CreditExpert, the online credit monitoring and identity fraud protection service from Experian.

CreditExpert will also provide you with a wealth of hints and tips about improving your credit rating, give you the chance to order your credit score – an indicator of your chances of being granted credit – and send alerts that tell you if there is a major change in your credit report, which could be an early sign of identity fraud.

See your free Experian credit report now. It could be the first step towards a more secure financial future.