Different Debt Categories
What challenges are you facing?
Many factors can contribute to your difficulties with debt, but it’s crucial to remember that you’re not alone—help is always available.
In the UK, there are several debt solutions specifically created to assist you in managing your financial situation. Taking the time to explore these options and understanding the potential complications associated with the debts you're facing can be beneficial.
Below, we’ve outlined some of the most common types of debt and how they function:
Debt from Credit Cards
Credit cards enable consumers to borrow funds to be repaid later. They are designed as a short-term payment solution and, when used responsibly, can help individuals manage their purchase costs while also improving their credit score.
However, debt can accumulate if payments on these accounts are missed. Lenders may impose interest and charges based on the agreement you established with them, which are categorized as non-priority debts.
Catalog Shopping Debt
When purchasing products from catalogue companies, many provide the option to split the total cost into smaller, more manageable payments. By choosing this method, you are effectively entering into a loan agreement with the company, which comes with specific terms that you need to follow to avoid incurring interest and fees.
Missing your agreed-upon payments can rapidly lead to debt accumulation. While these debts are classified as "non-priority," the situation can escalate quickly if not managed properly.
Shared Debt
You may find yourself in joint debt with another individual, such as a spouse or business partner. Typically, both parties share equal responsibility for the entire debt amount, a concept known as joint and several liability.
If payments are missed on any joint loan, both individuals are still accountable for ensuring the total debt is settled, even if one party has already contributed their share.
Utility Bill Debt
Utility bills cover services like gas and electricity used in the home and are paid to energy providers. Typically, consumers pay a set tariff or receive monthly bills based on their consumption.
If these payments are missed, you will fall into arrears, and the utility company may start applying late or non-payment charges, resulting in an increased total amount owed. Utility arrears are classified as priority debts.
Debt from Gambling
Gambling involves placing bets on various activities, such as sports, through a betting company. While it can be an enjoyable pastime, it is also a frequent source of debt for many individuals.
This debt may be owed to the gambling companies, credit agencies whose funds have been utilized for gambling, or even family members from whom money has been borrowed. Although these debts are classified as non-priority, they can escalate into significant issues for the gambler.
Rental and Mortgage Debt
Rent is the amount paid to your landlord or letting agency for residing in a rented property.
Mortgage payments, on the other hand, are made to mortgage lenders, which can include banks or credit unions.
If payments are missed, these providers may impose late fees or charges for non-payment, and these debts are classified as priority debts. Failing to make timely payments can lead to serious consequences for your financial situation.
Educational Loans
In the UK, student debt is primarily held with the Student Loans Company, which offers loans for tuition fees and accommodation costs. Although these loans are generally categorized as priority debts, they have distinct characteristics compared to other forms of debt.
Repayment begins only when your income exceeds a specific threshold, and the amount you pay back is determined by your earnings rather than the total debt owed. However, you could face consequences if you deliberately evade repayment once you meet the eligibility criteria.
Short-Term Loans
Payday loans are financial products designed for individuals in need of quick cash, typically marketed as a short-term solution until the next payday. However, the drawback is that they often come with exceptionally high interest rates.
It’s easy to fall into debt with these lenders, especially if you miss repayments or if the escalating interest makes the total amount owed unmanageable. Such debts are classified as non-priority debts.
Priority Debts Compared to Non-Priority Debts
Debts are typically categorized into two groups: ‘priority’ and ‘non-priority’ debts. The distinction is straightforward—priority debts take precedence over non-priority debts.
This classification exists because priority debts, such as mortgages and utility bills, can lead to more severe consequences if left unpaid.
After you’ve addressed your priority debts, you should focus on your non-priority debts. The order in which you choose to pay these off is entirely up to you, but it's advisable to tackle those with the highest interest rates first to prevent your total debt from escalating.
Seeking Debt Assistance
The debts outlined above are not an exhaustive list, but they do encompass some of the primary types you may be facing.
If you’re unsure where to begin, our debt specialists are here to help you get started.
- Why not contact us for a conversation?
- Alternatively, you can fill out the online application, which will provide us with insights into whether an IVA might be the right option for you.
RMS Financial assists over 3,000 individuals in the UK each year.
Our team of specialists helps thousands of families regain control of their finances through an IVA.
Is an IVA the right choice for you?
We can evaluate your eligibility for an IVA.
Would you rather discuss this later?
We are here to provide support in helping you find a solution.