Cost of Living Crisis: Navigating Debt
With the cost of living crisis continuing to impact millions of people in the UK, we break down how to navigate your debt and where you can access support if you need it.
What are the different types of debt?
Debt is a sum of money that a person owes to another person or company. Debt can come in many forms - it can be the money you owe for having services like gas or electricity running to your home, the money you owe a bank or landlord for access to that home, or the money you owe a credit company for borrowing money.
Here are some key terms to understand on the different types of debt:
- Secured debt: Secured debt is when you borrow money and use a physical asset as collateral, such as a home or your car. If you can’t repay your debt, the lender (or creditor) has the right to repossess the asset you used as collateral to pay off the money you owe. Common types of secured debt are mortgages, and car finance loans.
- Unsecured debt: This is the type of debt where there is no collateral, and means that your assets cannot be taken from you. Some common types of unsecured debt are credit cards, student loans and personal loans.
- Good debt: Not all debt is bad debt; good debt is the kind that will benefit your future. It is planned and budgeted for, and will have a positive effect on your long term financial position. Examples of good debt are things like a credit card or a phone contact that you regularly pay off on time every month.
- Bad debt: Bad debt, on the other hand, is the kind that will drain your resources and offer little or no longer term benefit. It includes things like payday loans or high interest credit cards. Whilst these things are known as “bad debts”, often people resort to using them because they aren’t able to access any better options.
- Arrears: This is money that is owed for services or goods received that should have been paid earlier, for example rent or utility bills.
How are racialised people affected by debt?
Any type of debt that you are struggling to manage or pay off can cause anxiety, especially if you are being chased by the people you owe that debt to. More than half of adults who struggle with managing debt also live with mental ill-health (read more about the link between debt and mental health here).
In the UK, there is a racial debt gap meaning that Black and Asian households are more likely to be affected by debt. Structural inequalities and systemic barriers in education, health and economic opportunities - like the ethnicity pay gap - mean that certain groups in the UK are disproportionately affected by debt.
Here are some examples:
- 53% of white UK households own their homes, in comparison to 24% of Black UK households. Black UK families are spending more money on rent.
- Racialised people generally have much lower levels of savings or assets than white British people. For every £1 of white British wealth:
- Pakistani households have around 50p
- Black Caribbean around 20p
- Black African and Bangladeshi approximately 10p
- When we look at who is paid below the National Minimum wage, we can see:
- Around 18% of Bangladeshi workers
- 11% of Pakistani and Chinese workers
- 5% of Black African and Indian
- 3% of white workers.
All of these factors mean that racialised households and families may have less income and higher expenses (to understand more about this, check out this report by the Runnymede Trust). This is worrying especially during the cost of living crisis where common household essentials and utilities are rising.
There are also different religious considerations, cultural beliefs and attitudes towards debt which may influence the support you are able to seek. There can also be different stigmas to talking about debt or dealing with debt worries.
What can I do?
Debt can leave a lot of people feeling helpless and out of control, especially if you’re struggling to get on top of debt as costs rise. Here are some organisations that can help:
- Explore the Spark & Co. debt support page on our cost of living hub.
- StepChange has a team of debt experts who help people deal with their debt problems. They offer free, flexible debt advice that is based on a comprehensive assessment of your situation. They then provide practical help and support for however long it’s needed.
- Turn2us is a national charity providing practical help to people who are struggling financially.
- National Debtline is a charity that gives free and independent debt advice over the phone and online. They have created a cost of living hub with lots of tools and support if you are struggling to make ends meet.
It’s important to know though that there are absolutely things you can do to help.
What can I do? Prioritise your debt
There are different consequences to different types of debt, some more severe than others. It's essential to pay off your debts in the right order and you can do this by categorising and prioritising your debts into:
- Debt emergencies: Debts where you may be facing an emergency action such as eviction, court order, disconnection or bailiffs.
- Priority debts: Debts that have severe consequences if you don’t pay them such as council tax, TV license, mortgage or rent, utility bills and child maintenance.
- Non-priority debts: These are debts where the consequences are less serious such as overdrafts and payday loans. If you don’t pay non-priority debts, the person or organisation you owe could eventually take you to court or instruct bailiffs to collect money from you.
What can I do? Have a budget in place
At Spark & Co. we deeply believe that a lot of debt is caused by wider failings in the systems around us, and the lack of effective support for people. As the cost of living crisis unfolds, it’s important to say that budgets alone are not the solution.
That being said, having a budget in place is a really helpful tool for you to see why you are in debt, and where your money is going.
With most creditors, you can call and ask to be put on a payment plan that you can afford. In order to make this agreement, most places will ask for your budget so they can see what you can actually realistically afford based on your income. Step Change has a great guide on making your personal budget.
What can I do? - Contact your creditors
Contacting your creditors may be the last thing you want to do, but there are benefits to speaking with them:
- Firstly, it is your right. Creditors have a responsibility to support you and treat you fairly by offering affordable options to help pay off what you owe. You can tell creditors what you can afford (and share your budget) and they have the responsibility to support you to pay debt back in a way that is manageable for you.
- Secondly, it stops the debt from getting worse. If you ignore the problem, the creditor may add additional late payment fees or interest. If you know you’re going to struggle to pay a bill, then let the creditor know sooner rather than later so they can support you before it becomes a bigger problem.
Remember - your creditor must help you, and in most cases there are a range of options they will have available.
Where do I find out about my rights?
Organisations you owe money to (creditors) are entitled to contact you to collect unpaid debt. This can be in the form of a letter, phone call or home visit. However, they must act within the law when pursuing a debt you may owe to them.
Remember, you do have rights and it is important that creditors act within the law. Here are some place you can find out more about what your rights are:
- Step Change have a support hub covering your rights and unfair treatment by creditors
- Citizens Advice Bureau can support with understanding what debt you are responsible for, checking and challenging debts
- Mental Health and Money have support on how to deal with debt collectors contacting you
- Citizens Advice Bureau also has information on understanding your rights with bailiffs.
Ultimately, debt can be a challenging thing to navigate. It can impact your mental health and wellbeing, your credit score, your relationships with work, family and friends and have some serious consequences on your long term financial wellbeing.
Due to the cost of living crisis, many people are feeling trapped by their debt and costs of essentials rise around them. We know that more and more households are having to choose between essentials, and that managing debt is even more challenging under these circumstances.
As an individual, you have rights when it comes to managing your debt, and if you’re feeling a little lost or helpless, remember that there are things you can do.
Start by visiting the Spark & Co. support page on debt and money support to see where you could get support from,
You may also find the following resources from our cost of living series helpful:
This piece was written by our Founder and Director, Ishita Ranjan (She/Her). Find out more about her here.