Different Types of Debt and Credit

At this present time we have become a nation dependent on credit, and average debt per household currently stands at over £8,000 – not including mortgages. It’s no wonder that so many of us have been getting into trouble with our finances at one time or another and interest rate increases means that even more of us feels that pinch. But it’s not surprising that our levels of debt have grown. We live in a culture where we are constantly barraged by the ideal world and how we should be living and the offers of credit have also grown in number.

The stigma that the country once associated with debt, or of being in debt, has long since vanished, and now its merely thought of as ‘normal’ to have debt and to live outside of our means. We have a wide array of credit and debt options to choose from, and if one lender won’t lend to us, there are plenty more out there who cannot wait to offer us their money to spend and pay back in the future. Here are a few examples of some of the ways we can get into debt;

Credit Cards
Credit cards have certainly grown in popularity – before 1970 and the invention of the magnetic strip they didn’t exist, and now pretty much every household has one. And if you haven’t got a credit card, you will surely have been offered one before now. They can be owned and provided by the bank or a financial institution, such as Visa, or by a large company. Marks and Spencer offer their own credit cards, as do many others.

Interest rates on these cards tends not to be very favourable when compared to mortgage rates, or loans but they are so handy that it is easy for us to spend on them, vowing to either pay off the full amount at the end of the month or to spread a large payment over a few months so as not to break the bank. Used wisely, for emergencies, or to transfer balances to 0% accounts, they can help and be useful, but when spending on them gets out of hand it can all go horribly wrong, and somehow, spending on that little piece of plastic isn’t really like spending your own money. You don’t associate it with paying the money back later on its just like buying something, without having to focus too much attention on to its price – you can sort the boring stuff out later, after all.


Store Card debt
These too have grown immensely in popularity, and many stores offer them, giving their customers to purchase items from their own stores and pay back at a later date. These are loyalty building as well – if you can’t afford to buy something new to wear for a party, but need something, and then see the ideal little dress or top in the store that you have a store card for – you can treat yourself, look good for your night off, and pay for it next month, when you can afford it… Ingenious! Store cards often have a high rate of interest on debt, like the credit card, much worse than a loan rate or mortgage, and in some cases they can be even worse. New legislation means that if you are paying over 25% interest, at some point in the future, this will have to be marked on your bill so that you can tell.

HP/Finance
Offered on some large purchases – things like 0% interest free credit aren’t so bad for the time that the offer exists – but again, this kind of debt can come with a sting in the tail. Most new car finance, involves HP – buying goods on ‘hire purchase’ – this is where the finance company buys your large item for you, you get to use the product and pay them back, paying them interest at the same time. Really we all need to learn to take time out to read the small print here and not to be pressured in to anything too hasty because we must have that leather sofa or new car.

Mortgage
The mortgage is the largest debt most of us will ever have attached to us. House price increases have been thick and fast in the past few years, although we are now tipped for a decrease in house prices they far out weigh our salaries, and we have stretched ourselves to get a foot on the property ladder. Not too bad with the fixed rate deal that we have managed to get for ourselves, but not so good when that discount comes to an end and the market has changed in the mean time and we are unable to get the same rate again.

It’s nice to have a little room to breathe here – but not always possible to have. If you can’t pay your mortgage or debts secured against your house, you can lose your property through repossession. If this is a situation you find yourself in you must start talking to your mortgage lender and get help as quickly as possible. Don’t miss any payments as the repercussions of this can last for a very long time – affecting your ability to get a new mortgage in the future, or to re-mortgage your existing property.

Loans
Loans are usually offered via banks, or companies who specialise in credit – not all of them are good for you, so take care with the company you choose to get a loan from. Loans can be secured, or unsecured. This means that they can be secured against property or other assets, or not. If secured against assets such as your house and you don’t make the repayments on the loan – the company you are in debt with has the right to seize and sell your assets. This can be a disaster waiting to happen. If the debt is unsecured your home is safe theoretically but if the company can make you declare bankruptcy, anything you have can be taken and sold to pay your creditors. Loan companies, as a rule, don’t like to lose money – it makes their line of work very unprofitable! Either way you can end up with a damaged credit rating and even more debt to pay off in the long run as costs are added on to your loan amount.