Some people avoid talking about their debts and miss out on the necessary help because they’ve heard something that has put them off or they’ve looked it up online and found incorrect information. But the truth is dealing with your debt doesn’t have to be daunting. Seeking the right support can address your money worries and stresses and allow you to find a debt solution suited to your needs.
To help ease those financial worries, we’re going to take a look at some of the most common debt myths and debunk them. We’ll also be discussing some of the commonly used terms when it comes to all things money and debt as this can often leave people confused.
Common debt myths: Busted!
1. You need a good credit score to take out credit
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.
2. Your bad credit rating affect the people you live with
A credit rating is specific to each person, so your rating will not negatively impact the people that you live with, and vice versa. A bad credit history only affects someone else if you are financially linked to them, for example, through a joint mortgage.
3. Your family needs to pay your debts off when you die
Creditors may require your family to settle an unpaid balance with money from your estate, such as a house, savings, or investments. So, unless you have savings or assets to sell off, your family do not need to pay your debts when you die. However, it’s worth noting that if you have a joint debt, the person(s) you share this with will be liable for the full remaining balance.
4. The less you borrow, the more appealing you are to lenders
While this myth does have some logic to it, it’s not necessarily true. You may well have stayed out of debt by not having to borrow money, but this doesn’t show lenders that you are good at managing money. When you don’t borrow money, you don’t build up a credit history. Lenders want to know that you have been accepted for credit and that you are good with the repayments.
5. You will face prison if debts are not paid
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 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.
6. You will lose your home if you go bankrupt
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.
7. Bailiffs can force entry into your home
If bailiffs are collecting debts owed to HMRC or unpaid magistrates’ fines, then they may force entry into your home, but this is very rare. If you have allowed bailiffs into your home previously and signed a ‘controlled goods agreement’ then they can enter your property.
8. Missing payments can result in you being blacklisted
While lenders do refer to your credit history when deciding whether to lend you money, missing a payment doesn’t mean you will be blacklisted from taking out future credit. Although this myth has been around for quite some time, there is no such thing as a blacklist.
Debt and money terms and what they mean
Money and debt jargon can often leave people feeling flustered and confused, which is the last thing you need when you’re trying to gain a better understanding of your finances. Here we discuss some of the most commonly used money and debt terms and explain what each one means in simple terms.
A type of payment plan approved by the county court and your creditors to make debt repayments more affordable. The county court takes a monthly payment from you and this is distributed to your creditors.
Annual Percentage Rate (APR)
APR refers to the yearly cost of borrowing money and takes into consideration the interest rate plus any additional fees of a credit offer. Before signing an agreement, lenders must tell you what their APR is.
A legal procedure where your debts are written off by the courts if you can’t pay them back in a reasonable time. Any assets you may have will be sold to repay your debts.
Taking out a new single loan to repay two or more debts, typically with a lower monthly payment and longer repayment period.
County Court Claim
A legal process creditors can use to collect any outstanding debt.
County Court Judgement
A court order informing you what to repay to your creditors.
Debt Management Plan (DMP)
A way to repay your debts by making reduced payments to creditors when you’re unable to pay the full amount that was set out in the agreement.
Debt Relief Order (DRO)
If you’re unable to pay your debts, this is a way to write them off. You have to meet certain criteria to apply for a DRO, such as having little or no disposable income, not having any assets of value and owing £30,000 or less.
If you miss a payment to your creditors, this results in a default on the agreement and can affect your chances of successfully applying for credit in the future.
A court notice to show your bankruptcy period has ended and that you are debt-free.
A type of credit agreement where the goods do not belong to you until all the payments set out in the agreement have been paid.
Individual Voluntary Arrangement (IVA)
This is a legally binding agreement between you and your creditors where you pay back an agreed proportion of your debts over an agreed period of time (usually five years).
A legal process that allows your debts to be written off in full or in part, including bankruptcy, IVAs, and DROs.
If you fail to make payments for these types of debts, the consequences are not as serious as they would be with other debts.
Payment Protection Insurance (PPI)
A type of insurance often sold with loans, credit cards and mortgages, covering repayments for a set period of time if you’re unable to pay due to an accident or illness, for example.
If you fail to make payments for these types of debts, the consequences can be more serious than for other debts.
The money you borrow is secured on an asset such as a house or car. If you fail to keep up with your payments, the creditor may take ownership of the asset.
The practice of lending money to people who don’t have a good credit history. Considerably higher interest rates apply to reflect the risk to the lender.
Sometimes referred to as a personal loan, unsecured loans are not attached to assets.
An interest rate that can increase or decrease and is decided by the lender.