Types of Debt

Debt is defined as any amount of money that is owed or due to a creditor or lender. There are various types of debt that people may have, and these can affect individuals in different ways. These may range from consumer and household bills debts to government and housing debts, each of which should be dealt with properly. Here you can find an overview of different debt types and the support available to help you gain a better understanding of how to manage your finances.

Consumer credit debts, such as credit cards, overdrafts, and car finance, are commonly used to borrow money for purchasing consumer goods like cars and clothing. They are meant to be a short-term solution for making payments. When managed responsibly, this type of credit allows consumers to spread out the costs of purchases while also building their credit score. However, if payments are missed, debt can quickly accumulate. For this type of debt, lenders may also impose interest and charges in line with the agreements you’ve made.

Whether you rent or own your home, you’ll usually make regular payments which allow you to securely remain in your living situation. But if you struggle to keep up with the repayments for any reason, you may find yourself worrying whether you’ll be able to stay in your home. For this debt type, you might require support with creating a budget, advice on avoiding eviction or repossession and assistance speaking to your lender or landlord.

When you’ve signed a credit agreement with another person, such as a spouse or business partner, this becomes a joint debt for which both individuals will be equally responsible. When repayments are missed on any joint loan, it will still be both parties’ responsibility to ensure the total is paid off, even if one person has paid off their half.

Household bills refer to the services you pay for within your household, such as gas, water, and electricity usage. These are usually paid directly to the provider and the cost is based on usage or an agreed tariff.

If these bills are missed, you may fall into arrears with the account, and the provider may also begin to add late or non-payment charges, which can increase the total amount owed. To resolve these debts, you’ll typically need to contact your provider directly to arrange a way to pay it off such as a payment plan.

Government debt includes things like council tax, HMRC and CSA. These are often classified as priority debts and failure to pay these can have a worse impact on you than other debts such as consumer debt. Enforcements may include bailiff visits, deductions from your earnings and in rare cases, prison. But the earlier you contact the relevant body, the easier it can be to avoid this debt type becoming an issue for you in the future.

Entering into contractual agreements usually means you’re agreeing to pay for goods or services such as a mobile phone or gym membership over a minimum term. This means you must pay the rest of the contract, even if you fall behind with payments or choose to cancel the service early. If you go into arrears, you may lose access to the goods and services.

If you find that your financial circumstances change and you can no longer afford the payments within your contract, you can contact the provider to work out an alternative arrangement such as lowering payments over a longer term or setting up a payment plan.

Gambling is when individuals place bets on activities such as sports and events through a betting company, either online or in person. While gambling is a popular recreational activity for many, it can also lead some people into debt. Whether the debt is with the gambling company, credit providers whose money is being used for gambling, or family members who have loaned money for this purpose, this non-priority debt can become an issue. The way this debt can be resolved will depend on who the debt is with, which is why this is normally assessed on a case-by-case basis.

There are a variety of different loan types that individuals might take out to support their finances. From short-term loans provided by family members to long-term loans offered by a bank or building society, when you take out any kind of loan, you’ll be borrowing a fixed amount and repaying in specified amounts over an agreed period. There will also be terms to your loan, which may mean that if you don’t keep up your repayments you may be subject to interest which can increase the total amount to be paid back.

It’s also important to note that student loans provided by the UK government are often treated differently than other loan types due to them being back similarly to taxes. Student loans typically won’t affect your credit score and are written off after 30 years.

A debt secured against property (known as collateral) is what we call a secured debt. In other words, taking on a secured debt requires you to put something valuable you own on the line. These types of debts are most commonly linked to mortgages or car loans.

If you fail to make payments, the lender or creditor can seize the property that you’ve used as collateral. This is considered a debt with more severe consequences, as it could result in the loss of your home or vehicle.

Meanwhile, an unsecured debt won’t be tied to any collateral, meaning it can have less severe consequences.

Credit cards, consumer debt and gambling debts are just a few debt types viewed as unsecured.

You’ll often see debts being categorised as ‘priority’ and ‘non-priority’, and this simply means that your priority debts should be dealt with before any non-priority debts. They are generally classified this way because priority debts like mortgage bills, rent arrears and household bills carry more serious consequences if they aren’t paid.

Only after you’ve made your payments to your priority debts should you start to look at your non-priority ones. The order in which you then decide to pay these debts, including consumer and gambling debts, is down to you. As a general rule, it’s worth addressing the ones that carry the highest interest rate first so that the total amount you owe does not spiral upwards.