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As the new year is here, lots of headlines state that the average debt per household in the UK is currently sitting at £65,756. This can sound a scary amount, but considering that the literal definition of debt is “to owe money”, this amount can mean mortgages, overdrafts and even ‘buy now pay later’ purchases. This style of reporting instantly strikes us with debt as a negative – inferring debt is something shameful and scary and creating a feeling around it that makes people secretive about it, makes people struggle to get help and end up in hot water.
This year we are trying to break that stigma with a full campaign. But for now we are here to educate. We aim to help people truly understand what debt is and to start a conversation about it that may one day help someone get the help they deserve.
At MoneyMagpie we are not registered to offer financial advice. We, however, can report on what the experts say. So we have joined forces with Jonathan Mills of MoneyPlus Advice to offer his expertise. In this article we aim to share popular myths around debt and to answer whether they are true or false.
There is “good debt” (mortgages, car loans, student loans – borrowing for investing in an asset, such as shares, that might improve your financial situation) and “bad debt” (Simply put, “bad debt” is debt that you are unable to repay. In addition, it could be a debt used to finance something that doesn’t provide a return for the investment.)
Good debt can open up an opportunity to you that you otherwise couldn’t have and can even help build a credit score. Jonathan Mills from Debt Advice Firm MoneyPlus says “False. There are very few people that don’t utilise debt, be it for an emergency purchase or to buy a home, there are many examples of good uses of debt. The key is responsible borrowing and transparent and honest evaluation of your financial position. Careful planning and budgeting are essential skills whether you are taking on debt or organising the repayment of debt. Debt tends to turn bad when you cannot afford repayments.“
Debt Advice Firm MoneyPlus Advice tell us that “People sometimes worry they will be sent to prison if they do not pay their debts, but this only happens in very rare cases. If you fail to pay priority debts such as council tax, a criminal fine, child maintenance arrears, or business rates, then a prison sentence can be enforced. But this is used as a last resort after other action has been taken against you and failed.”
Whilst it can happen, it is not a guarantee. If you file for bankruptcy then your home and any other assets you own will be at risk of being sold to recoup the monies owed to your creditors. However, this does depend on various factors such as the type of bankruptcy, your mortgage payment status, as well as the equity in your home. If your home has little equity, then it’s unlikely to recover sufficient funds so it may not be worth selling. Before looking at bankruptcy, seek financial advice to fully understand the risks involved.
This is actually how some people end up in hot water. A credit score reflects how reliable you are in repaying money, and so if you have a poor credit score, it can make it harder for you to borrow money and get good deals on things such as loans, credit cards and a mortgage. However, your credit score doesn’t have to be good in order for you to borrow money. Different lenders will be looking for different things when they assess potential customers, and so while some companies may refuse you if your credit score is low, others may accept you.
Jonathan Mills reassures us that “There’s no such thing as a ‘credit blacklist’. Clearly lenders use information on your credit report to determine creditworthiness, but there is not a central list of ‘risky borrowers’. The ultimate purpose of your credit report is to allow for assessment of your financial behaviour; criteria for lending is generally unique with each lender.”
To finish, the most important thing is to educate ourselves around our finances. Whilst the word debt can be petrifying, it is worth equipping ourselves with an understanding as to how it works.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.