How to manage your money – debt

“I’m worried about debt.  What do I need to know?”

It’s important to know that not all debt is bad.  There is good debt and bad debt.  You might have a good reason for taking out or going into debt.  Not many people have enough money in their bank account to buy a house, so almost everybody takes out a mortgage, which is long term debt.  You might have just moved into a new flat and need to buy furniture and white goods like a fridge and washing machine all at the same time which might be impossible unless you take out a loan.  If you start a business then you might take out a business loan to cover start-up costs.  All of these are very normal debts.  All of these are ok so long as you’ve planned for it and so long as you can afford to pay it back.

“Debt becomes a problem when you lose control of it.”

What is bad debt?

Debt is a problem if you didn’t take it out for a specific purpose, or if you didn’t plan for how you would pay it back.  It is also a problem if you have been pressured into going into debt, perhaps by a partner, and you don’t have full control of that debt.

Three debt tips

If you are going to take out debt (a loan, credit or overdraft) then make sure that you have done these three things first:

1. Budgeted for it
2. Worked out exactly how much you will need to repay each month
3. Checked that you can make those repayments in full and on time

What’s the difference between a loan and credit?

A loan is one-off borrowing.  You’re borrowing a single amount of money once and then paying it back over time or in one go.  Credit is like an ongoing, revolving loan that is offered and renews each month.  An overdraft is credit – it’s always there and often you might go in and out of it over the course of a month.  Overdrafts and credit cards can be used to boost your credit rating.

What is a credit rating?

A credit rating or credit score is a number used by financial companies like banks and money-lenders to decide whether you can access certain products and get good deals.  You credit score changes over time and is mostly decided by how good you are at borrowing money and then paying it back on time.  The banks decide your credit score and it’s difficult for you to change it quickly.  We cover the different types of debt and your credit score in more detail in our article about debt.  Most essential bills that you have to pay, like your electric bill or your phone bill, will count towards your credit score.  If you have a good credit score then companies will be happy to let you borrow more money (perhaps a car loan or something like that).  If you have a bad credit rating then you might have credit refused so it can be hard to get things like a phone contract when you want to pay monthly instead of being on pay-as-you-go.  

How to get a good credit rating

To get a good credit rating you need to show the bank or lender that you’re a reliable borrower.  That means that you can be in “good” debt and make all of your repayments.  You need to show that you’re a reliable borrower.  You don’t want to get into debt for no reason, but you do want to show the banks that you can manage debt.

What are loan sharks?

Loan sharks are illegal moneylenders.  They are not regulated by the financial authorities so don’t follow the rules that the banks and big money lenders do.  They often target vulnerable people and trap them into cycles of debt.  Borrowing money from a loan shark is a bad idea for three reasons:

1. They charge so much more than a legal bank or moneylender.  Even if it seems like a quick and easy option, it will cost you more.  One lady borrowed £500 from a loan shark and ended up owing them £88,000!
2. They often use intimidation and harassment to get what they want.
3. They will NEVER help you to get out of debt.  Their mission is to make you borrow more and keep you in debt, offering repayment loans and piling debt on top of debt.

How to spot a loan shark

It’s not always easy to spot a loan shark. They won’t tell you that they’re a loan shark.  There are a few giveaways though.  They won’t offer you any paperwork.  They will keep it “off the books” and “hush-hush”.  This might seem easier than going through the process and paperwork of getting a loan from a bank, but it means that they can exploit you.

“If it sounds too good to be true, then it probably is.”

Alternatives to loan sharks

You can go to your bank or a legitimate moneylender.  You can also join a local credit union.  A credit union is like a club that you save your money into, and in return when you need to borrow money they can give you a loan that is more affordable and they will treat you fairly.

You should also check that you are getting all of the benefits and help that you’re entitled to.  You can get help with this from Citizen’s Advice.  You can also check with your local council if there are any grants or a hardship fund than you can access.  

What happens if I don’t keep an eye on my debts?

The first thing that will happen is you will get lots of messages and letters from your lender asking you to make repayments.  At this point, you should speak to your lender or a debt charity and make a repayment plan.  If you ignore their messages they might start charging you more so your debts will become more expensive.

If you don’t repay your debts in time then your lender might pass your debt on to a debt collector.  They will be very persistent and contact you frequently to demand money.  This can be very unpleasant.

If you are still unable to make repayments then the next step is that you can be taken to court and have a County Court Judgement (CCJ) taken out against you.  This will probably harm your credit rating.

The worst case is that if you still can’t pay your debts after all of that you might have no choice but to declare bankruptcy.  Bankruptcy can give you the opportunity to sort things out in the short term but it has medium and long term effects.  Being declared bankrupt massively restricts what you can do with your money and takes years to work back from.

If you’re struggling with your debts

The first thing that you should do is speak to your bank or a debt charity.  Do this as soon as you think you’re getting into trouble.  Don’t wait.  Your bank or a debt charity will help you to come up with an affordable repayment plan so that you can work your way out of debt.  They will give you free help and advice.

“You should NEVER pay for debt advice because you can get that help for free from a debt charity.  You are never alone and there’s always help available if you need it.”