Knowledge up on the different type of credit, what they are useful for and how they work.

Unsecured Credit

For example: credit / store cards, overdrafts, personal loans, mail order catalogues. Credit is lent to you personally and is not specifically secured against an asset.

Credit Cards

These can be an expensive borrowing method if you only make the minimum monthly payment. Always try to pay off the card in full to avoid unnecessary and sometimes extortionate interest rates. Many credit card companies offer a low introductory rate, however often reverting to far higher rates than personal loans after the introductory period ends.

Credit cards and store cards are also known as 'revolving credit'. Credit cards often provide a higher level of consumer protection than paying with cash or debit card.

Overdrafts

Although bank loans are usually unsecured, it is still important to deal with them early because of the often punitive charges for exceeding your authorised overdraft limit, charges for returned cheques / direct debits etc.

Overdrafts are also repayable 'on demand' - which means the bank can ask for its money back at any time. Some banks offer a portion of an overdraft interest free, however overdrafts are generally more expensive than loans; so do not use them as a way of borrowing money long-term.

Personal Loans

Generally the cheapest way of borrowing money, although a good credit rating is often required to borrow large amounts. If you can, cancel your credit cards and transfer the debt on to a loan.

Store Cards

Often provided with a discount for goods purchased on the day that you sign up for the card. More often they will charge rates around 30% APR. They can become very expensive if the account is not settled in full every month.

Charge Cards

Charge cards often carry an annual fee and the balance must be repaid in full each month. Settlement terms are often shorter than credit cards. American Express and Diners Club are the most famous charge card brands.

Mail Order Catalogues

Similar to store cards, however goods are purchased via mail order or through company agents. Again very high interest rates are common.

Secured Credit

The most common form of secured credit are mortgages. Mortgage repayments should be your number one priority. If you have mortgage arrears and fail to contact the lender, there is a chance of losing your property. The moment you know you are unable to sustain your monthly payments you should contact the lender. If you explain your situation they will try to help you.

Mortgage lenders have staff specifically trained to deal with situations such as arrears and negative equity. They are often willing to be flexible about repayment methods. As a general rule they don’t favour repossession unless it is felt absolutely necessary.

Secured Loans

If a bank or other lender has secured a loan or ‘charge’ against your property, then it should be treated as seriously as the mortgage repayments because the lender has the same right to enforce their security by starting repossession proceedings.

Hire Purchase (HP)

Often used to purchase cars. You’re partly paying off a loan, and partly renting the item. The agreement is often between the purchaser (you) and the finance company, not normally the supplier of the goods. The goods will belong to the finance company until payment has been made in full. It is a criminal offence to sell the goods under the hire purchase agreement with out permission from the finance company.

If you default on your payments after repaying in excess of one third of the total purchase price then they become “protected goods” meaning the finance company will need to obtain a Court order to repossess.

If you have paid half or more of the purchase price to the finance company you may be able to relinquish the goods to the lender without being subject to any further penalty. You will need to examine your finance agreement.

Priority Creditors

Priority creditors are mortgages, secured loans, hire purchase agreements, council tax, utilities (such as gas, electric and water), rent, court fines and Crown departments (Inland Revenue and VAT). Utility bills should also be treated as priorities because they may well take steps to disconnect supply. Your water supply cannot be cut off.

Personal Guarantee PG

Often used when to secure credit when lent to a Limited company. If a director of Limited Company has given personal guarantees (PG’s) and the assets of the business are insufficient to repay the bank / lender, then the lender can seek redress from the person that gave the personal guarantee.

Inland Revenue, VAT, Customs & Excise

In any case where you cannot meet payments due, the earlier you contact the creditor the more assistance you are likely to receive - it is important to make them feel that yours is a “can’t pay”, not a “won’t pay” situation.

Government departments can be helpful in these circumstances and may agree to accept payments by instalment or deferred payment.

Student Loans

Student loans no longer feature in the new legislation covering bankruptcy and will need to be repaid, even in the event of bankruptcy.

House Repossession Debt

The mortgage company / lender will pursue the borrower for the shortfall following a repossession and subsequent sale of the house. After the sale of the property, the shortfall becomes an unsecured debt. The lender is allowed up to 6 years to pursue the interest and 12 years on the capital sum outstanding, although in some instances this can be longer. More details of this and a list of settlement amounts can be found. Click here for more information on Repossession Debt.

Car Repossession Debt

Upon repossession and subsequent sale of the vehicle, the security has been removed and for negotiation purposes the debt is now deemed unsecured.