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Different types of credit and debt

Do you know your priority debts from non-priority debts, or the difference between secured and unsecured loans? With so many types of credit and debt out there, it can be hard to know which debts to pay off first.

It’s our mission to help you understand what happens if you don’t make certain payments and which debts you should pay off first. We’ll look more at the impact on your credit score after we’ve gone through which debts are the ‘most important’ and why.

Different types of credit and debt

You can take out credit for loads of different reasons; to buy a house, for a new car or to pay for a wedding. However, if you can’t afford to make the repayments, or you’re missing the repayments and interests and charges are adding up, you may be in problem debt.

When you take out any form of credit, you’ll borrow an agreed amount from a person or organisation and pay it back later. One of the most common types of debt we help people with is consumer credit.

You might recognise consumer credit as overdrafts; personal loans; store cards or finance; a short term loan; catalogue debt; hire purchase; logbook loan; insurance debt; doorstop loan; car finance; guarantor loan debts; credit card debt; and, more recently, Buy Now Pay Later.

Here are all the different types of credit and debt:

Business debts

Get advice and support whether you run a small business or are self-employed.

Consumer credit

There are certain safeguards in place to protect you from unfair lending or debt collection when it comes to consumer debts. Most in the UK are regulated by the Consumer Credit Act 1974.

Contract debt

You can enter a contract for services like a gym, mobile phone or TV package.

Court debts and fines

Courts have a range of powers to collect fines. This makes court fines for criminal offences some of the most important debts to pay.

Credit unions

A credit union is a community savings and loans provider. They’re for everyone and can often beat the rates on the high street.

Debts to other people

Loan sharks (which are illegal lenders) may start out friendly but things can soon turn if you’re unable to pay..

Government debts

Council tax, child maintenance, benefit overpayments and tax debts to HMRC are all government debts.

Housing debts

Whether you’re renting or paying a mortgage, keeping up with housing payments is so important so you don’t lose your home.

Joint debts

These are debts you take out with someone else – like your partner. There are different types like loans, credit agreements and bank accounts. You and the other person are both responsible for the whole amount borrowed.

Payday loan debt

Payday loans are a short-term type of loan, and usually have a significant amount of interest.

Student loan debt

Most people take out a student loan to cover tuition fees, accommodation and living costs. Usually, you’ll only pay this back if you’re earning a certain amount.

Utility bill debt

Gas and electricity are important payments to make – as they can be cut off if you don’t pay. Water companies don’t have the same powers..

Your priority payments

Priority debts are your debts that can cause you particularly serious problems if you don’t pay them. If you don’t pay your priority debts, they may become a debt emergency.

Debt emergencies are if you:

  • Have bailiffs at the door
  • Are about to lose your home
  • Are at risk of repossession

Above all else, it’s important that you keep a roof over your head – so mortgage and rent arrears, along with secured loans, go straight to the top of the pile.

Once your priority debts are under control, you’ll need to sort out non-priority debts. Just because they aren’t a priority, doesn’t mean there aren’t consequences for not paying – it just means they’re less serious at first.

Paying your mortgage should be the number one priority as you need to keep a roof above your head. If you are worried about falling behind on your repayments and need mortgage arrears advice, it’s best to stay calm and speak to your lender about what options are available to you. If you don’t, you could be at risk of losing your home.

You should complete an Income and Expenditure form to work out what you can afford, then ask your lender whether you can take advantage of a payment holiday or set up a repayment arrangement to get you back on track until your financial situation improves.

Similar to a mortgage, it’s important to keep up with your rent so you can continue to live in your property. If you find you are struggling with rent arrears, be honest with your landlord if you rent privately, or with the Housing Association and explain your financial situation to them – it’s in their interest to help and get you back paying your rent.

If you do find that you are unable to keep up with your rent, or if your landlord wishes for you to move on, speak to your local council to find out if there is additional support available to help with housing costs.

If you are struggling to pay a court fine, you will find details of where to contact for help on the ‘notice of fine’ letter sent to you from the court. Read this carefully and when you do ask for help, be honest with them and explain why you are unable to pay your fine. You may be given permission to pay your debt in installments or at a later date.

It’s important to keep up with your council tax repayments, as this money goes towards your local services. If you can’t keep up with council tax arrears, it’s best to get to get in touch with your council to see if you can make an arrangement – like making smaller payments.

If you don’t keep on top of payments, councils can charge you for the whole year in one go if you don’t pay within 7 days of being asked. Remember, if you live on your own or claim benefits, you may be eligible for a reduced council tax bill, so speak to your council today to find out more.

Child maintenance payments help with the everyday costs of bringing up your children. If you’re having trouble paying your Child Maintenance, get in touch with the CSA (Child Support Agency), who will be able to walk you through your options.

Have you ever been paid too much in benefits? If so, you will be asked to pay this back as it is classed as a priority debt. You should flag an overpayment to your benefits office and ask for an explanation as to why this happened, so you can correct your benefit income.

If you cannot afford to pay your essential living costs and debt repayments, you should contact the DWP’s Debt Management contact centre on 0800 916 0647 and explain your situation.

If you have purchased a vehicle or essential product on hire purchase, then you may deem this as a priority debt. It’s important you keep up with the repayments on a hire purchase, so you don’t receive a default notice and lose the asset attached to it.

If you cannot keep up with your hire purchase agreement, your creditor is likely to contact you and request payment. If you cannot pay, you should contact the creditor and ask for a payment holiday or repayment arrangement until you can improve your financial situation.

Penalty charge notices are issued by local councils and issued for breaking traffic rules. They could include driving in a bus lane or, in London, failing to pay London congestion charges. If you feel a charge is unfair, you can challenge it by writing a detailed appeal letter to the body that issued it to you.

You’ll usually only have to pay 50% of the charge if settled within a set period after its issue. So if you can pay, then do so sooner to pay less. If you cannot pay a penalty charge notice and feel the charge is fair, you should review your budget and make sure you are claiming all the benefits you are entitled to in order to raise funds.

If you watch live TV, then you will need a TV licence. To help suit your budget, you can pay for a licence annually, quarterly, monthly, fortnightly or weekly. If you are struggling to pay for your TV licence, you should visit the TV Licencing website and see whether you are eligible for a discount.

Keeping your home heated and lit is essential to everyday life, which is why it’s essential to paying your utility bills in full and on time. If you feel you are paying too much for your gas and electricity bills, you should use PayPlan’s Bill-Busting Guide, where you can compare and switch in a few clicks.

However, if you cannot switch for a better deal (which will be the case with your water bill) then you should write to your utility provider and ask for a payment holiday or arrange a repayment plan. You may also want to consider getting a smart meter fitted so you can keep on top of what you use and this may help with cutting back.

If you cannot pay your contract debt, you will need to act quickly to keep on top of it. You should contact the creditor straight away to make sure you don’t fall behind on your payments and incur charges to your account.

Be honest with your provider and see if you can take a payment break or set up a repayment arrangement until your financial situation improves. You may be able to enter a new contract and pay less each month over a longer period of time – just make sure you can afford the commitment.

If you are coming to the end of your phone or internet contract, use PayPlan’s Bill-Busting Guide, where you can compare and switch to a better deal in a few clicks.

Non-priority debts

The consequences for not paying non-priority debts aren’t as serious as not paying a priority debt. That’s because they won’t have an immediate effect on your daily life. Despite this, dealing with your non-priority debts is still important. Missing payments can impact your credit score. 

Here are some of the most common non-priority debts, as well as the consequences for not paying them.

An unsecured loan – or consumer credit – is leant to you in order to purchase goods or services. Lenders will look at your creditworthiness before lending to you, to make sure you can afford the repayments.

Examples of consumer credit include credit card debts, overdrafts, catalogue debts, logbook loans, store cards and buy now pay later schemes. When you take out consumer credit, you will be expected to repay your debt with interest attached. It’s important you keep up with your agreed repayments, otherwise you may face further interest and fines which will lead to larger overall debt repayments.

If you cannot afford to repay consumer credit, you should speak to your lender immediately to see what your options are. You may be allowed to spread the cost over a longer period of time or enter into a repayment plan to help you pay back your debts.

If you have taken a loan from friends and family, the arrangement is likely to be informal and you will probably only pay back what you borrowed. If you are struggling to pay back a debt to somebody close to you, the best thing to do is to be honest and tell them why you can’t pay back what you owe. You may be able to work out a budget together and come to a mutual agreement – you won’t want a relationship to breakdown over money.

If you have borrowed from a loan shark and can’t afford to pay back your debts, you should be careful. Some of these lenders have been known to use intimidation to get their money back.

Loan sharks operate illegally, so you are under no legal obligation to pay the debt back at all. However, you should report a loan shark if you feel you are worried at any point. Stay alert and work out a budget so you can deal with future money problems yourself or seek help – like payment breaks or breathing space – from your existing creditors.

A payday loan is a short term, unsecured loan to help cover month-to-month expenses. You should be wary of high interest rates attached to payday loans, as these could result in increased repayments down the line.

If you cannot pay back a payday loan, you need to make sure you don’t take out another loan to cover what you owe – this could put you into a debt spiral that is tricky to get out of. Next, you should contact your bank and cancel the Continuous Payment Authority (CPA) attached to the payday loan – this means the lender won’t be able to take money out of your account as and when they need it.

Once the CPA is cancelled, you should write to the payday lender and tell them you have taken this action, then try to work out a repayment plan with the lender to pay back what you can – this may be over a longer period of time.

Private parking tickets are issued for overstaying in places like supermarkets, hospitals or other private car parks. If you cannot afford to pay a private parking ticket, you should write to the company who issued the ticket. Offer to either spread the cost or make an offer of payment

You may be able to contest the fine if you feel it is unfair, so provide evidence if you feel this is the case. Otherwise, you may need to try and cut back for that month and pay the fine before the fee increases or they start action at the small claims court.

If you cannot afford a water bill, your water won’t be turned off. However, you should try to pay what you owe back before the water company chase you for payment and discuss court action.

The best thing to do to tackle a water bill is to make sure you budget effectively. If you claim benefits, you may be eligible for deductions on your bill, so find out what you are entitled to and speak to your water supplier as soon as possible.

Other types of debt

Dealing with many debts at once can leave you feeling overwhelmed. Hopefully, the above guide has given you a better idea of how to prioritise them.

In summary, put any housing-related bills at the top of your list. Now more than ever, you need a safe place to live. After these have been taken care of, look to any other priority debts such as Council Tax and utilities.

Once your priority debts have been dealt with, you should move on to any unsecured, non-priority debts. If paying these off is proving difficult, don’t be afraid to seek help either by using our online tool or getting in touch. Below you’ll find a few other types of debt that you may come across:

If you are self-employed or run a small business, then you may have business debts.

Business debts can also apply to people who have a buy-to-let property, limited company, business partnerships, are in the gig-economy or sole traders.

If you have taken out a credit agreement, such as a loan or bank account in joint names then both people are liable for the full amount of any debt. This is known as href=”https://www.payplan.com/advice/family-joint-debt/joint-and-several-liability/”>joint and several liability.

Divorce can also have a major impact on joint debts. Cost of divorce proceedings and change of lifestyle can all add to the pressure.

Repayments for student loans are only required when you start work and earn more than a threshold figure.

For the latest information on repayments, visit the student finance section on the government website.

Above all else, it’s important that you keep a roof over your head. So, mortgage and rent arrears, along with secured loans, go straight to the top of the pile.

Once your priority debts are under control, you’ll need to sort out non-priority debts. Just because they aren’t a priority, doesn’t mean there aren’t consequences for not paying – it just means they’re less serious at first.

Understanding your credit score

When you apply for any type of credit – like a phone contract, credit card or mortgage – the lender will typically check your credit score.

They’ll usually use one of three major credit reference agencies (CRAs), which are Experian, Equifax and TransUnion. You can get yours for free through companies such as ClearScore or Credit Karma which both use data from one of the three CRAs.

Why do I need to know my credit score?

Your score will help to tell your lenders how likely you are to be able to keep up payments. It will also alert them to anything they should consider before agreeing to lend to you.

While your credit score can affect the type of credit offered to you, working it out isn’t always straight forward. All three credit reference agencies (CRAs) have slightly different ways of working out your score.

If you’re aiming for a good score, then you’ll need to have a score within these ranges:

How to improve your credit score

  • Pay off existing debts – missed payments can be seen on your credit report for six years. Don’t panic, your rating will improve when you are seen to be making consistent repayments.
  • Register on the electoral roll – by registering to vote. However, if registering your address publicly puts you in danger, then seek professional advice before doing so. Citizens Advice can advise you on how to make sure your details are anonymous.
  • Pay bills on time – paying via direct debit means you’re more likely to be consistent with paying bills on time. This shows your creditors that you’re managing your finances.
  • Make sure your credit utilisation is low – research shows that lenders like to see you use around 25% of available credit. So, if your limit is £10,000, they recommend you spend around £2,500.
  • Check for fraud and mistakes on your file – if you notice something suspicious, contact your chosen credit reference agency and let them know.
  • Use credit for items you’d usually pay for – so long as you pay off your balance in full every month, you can use credit to pay for items that you’d usually pay for, like food and petrol.

Methods for paying off debt

Ever heard of the snowball of avalanche method to paying off debt? Though they may sound as far away from debt as you can imagine, they can be helpful if you’re struggling to pay off debts to multiple lenders.

Snowball method to pay off debt

The snowball repayment method is great for getting rid of your debts quickly.

All you need to do is:

  • Pay the minimum payment on all your credit cards – except the smallest
  • For your smallest debt, pay as much as you can towards it until it’s paid off
  • After that, work your way up – paying as much as you can on your next smallest amount

With every debt you pay off, you’ll have more money to put towards the next one. That means as the debts become larger, you’ll be able to pay them off quicker.

Avalanche method to pay off debt

If you’d rather pay your debts off over a longer period and pay as little interest as possible, then the avalanche method could be for you.

All you need to do is: 

  • Target your debt with the highest interest rate
  • This means you’ll be paying off the debts that are costing you the most money in interest
  • While it may take you longer to pay off, you’ll pay less interest than you would if you used the snowball method

Balance transfers

Using a balance transfer can also make paying off credit card debt a bit easier.

This involves transferring any existing debt you have to a card with a lower (or even 0%) interest, allowing you to pay less interest and pay the debt off quicker.

The problem is that these cards only tend to be available to people with good credit scores. So, you might find that balance transfers aren’t an option for you if you are struggling with debt.

What’s more, some credit card providers might charge you a one-off amount for transferring your credit card debt to a different card. To avoid this, be careful to check any terms and conditions before agreeing to a balance transfer.

What is persistent debt?

Persistent debt is when you’re paying more in interest and charges than you are paying off actual charges on your credit card for at least 18 months.

Your credit card provider will let you know if you are in persistent debt. They’ll send you letters to explain your options after 18, 27 and 36 months of not making minimum payments.

If you find yourself in persistent debt, then try:

  • Paying more than the minimum payment each month
  • Making one-off additional payments when you can afford them

Need help managing your money? Use our online debt tool to find out your options

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