Debt & Credit

Debt has a reputation problem. People talk about it as though all debt is equally bad, something to be ashamed of and eliminated at all costs. That's not right. Debt is a tool. Like any tool, it can be used well or terribly. Understanding the difference is one of the most practically useful things you can learn about money.

Good debt vs bad debt

The distinction is simple in principle: good debt is used to acquire an asset that is likely to appreciate or generate income — a mortgage on a property, a student loan that increases your earning capacity, a business loan. The interest you pay is the cost of accessing something that should make you more money than the debt costs.

Bad debt is used to fund consumption — things you eat, wear, or use that have no lasting value. Credit card debt on holiday spending, financing a depreciating car you can't afford, buy-now-pay-later on clothes. You're paying interest to own things that are worth less every day.

How credit scores work in the UK

Your credit score is a number that tells lenders how likely you are to repay a debt based on your history. In the UK, the main credit reference agencies are Experian, Equifax, and TransUnion — each uses a slightly different scale but the same basic inputs.

What affects it:

• Payment history: the biggest factor. Missing payments hammers your score. Paying on time, every time, builds it.
• Credit utilisation: how much of your available credit you're using. Using more than 30% of your limit signals financial stress to lenders — keep it lower.
• Length of credit history: older accounts help. This is why it's usually worth keeping your oldest credit card open even if you rarely use it.
• Credit applications: every hard search (when you apply for new credit) temporarily dips your score. Don't apply for lots of credit in a short period.
• Electoral roll: being registered to vote at your address helps. Lenders use it to verify identity.

You can check your credit report for free through Experian, ClearScore (uses Equifax), or Credit Karma (uses TransUnion). Everyone should do this at least once a year.

Debt-to-income ratio

The debt-to-income (DTI) ratio is your total monthly debt payments divided by your gross monthly income. If you earn £2,000/month and your total debt payments (mortgage/rent, loans, minimum credit card payments) are £600, your DTI is 30%.

Lenders use this when deciding whether to approve loans and at what rate. Generally: below 20% is healthy, 20–35% is manageable, above 35% starts to concern lenders, above 43% will get most mortgage applications rejected. Keep it in mind when taking on new debt — not just whether you can afford the payments today, but what your total picture looks like.

The compound interest trap on debt

Compound interest works for you in investments and savagely against you in debt. A credit card at 29% APR, with a £1,000 balance and minimum payments only, will take over 9 years to pay off and cost nearly £2,000 in interest alone. You'll pay twice the original amount.

£1,000 balance at 29% APR	Pay £25/month (minimum)	Pay £100/month
Time to pay off	9+ years	12 months
Total interest paid	~£1,900	~£145
Total paid	~£2,900	~£1,145