Sleepless Nights & Hidden Secrets: The Taboo Surrounding Debt

Why is it that ‘debt’ is still considered something of a dirty word? Is it, perhaps, a symptom of our ‘very British reserve’ that discourages any talk of money, or perhaps a hangover from a time where debt was less common and therefore seemed more risky?

The reality is that debt is extremely common. In fact, KnowYourMoney.co.uk recently commissioned an independent survey among more than 2,000 UK adults and found that 62% of the respondents are in debt – credit cards (35%), mortgages (24%) and student loans (11%) are the most common forms.

However, despite its commonality, debt is not something we feel comfortable talking about; over two-fifths (41%) of people in debt said they would not want to discuss the subject with their friends or family.

Belle About Town spoke to John Ellmore, director of KnowYourMoney.co.uk, about the important questions regarding people’s approach to debt and, more generally, the way they are managing their finances.

Good debt versus bad debt

Let’s delve a little further into the aforementioned KnowYourMoney.co.uk study. The research uncovered 29% of people in debt do not feel in control of their finances. This is unsurprising when you consider that 33% admit to buying items using debt – such as credit cards or through a finance plan – without first considering if they can afford the repayments.

This is a fundamental error to avoid when taking on debt; people must only accrue what they can afford to repay, and not at the expense of other important financial outgoings such as their general cost of living or other debt repayments. In other words, people should only take on ‘good debt’: that which can be paid off in a manageable way and will provide long-term value.

Bad debt, conversely, is that which either cannot realistically be repaid or will not offer any significant long-term benefits. This ought to be avoided. Sometimes easier said than done, but a little forethought and a clearer picture of your finances will go a long way here.

Understanding your debt-to-income ratio

Understanding one’s debt-to-income (DTI) ratio is vital for anyone seeking to adopt a responsible, diligent approach to his or her personal finances.

What is your DTI ratio? Simply put, it is how much debt a person has in relation to his or her earnings. More technically, it is calculated by dividing your total recurring monthly debt by your gross monthly income, with the resulting percentage offering an individual a better understanding of their financial situation.

If the goal is to make sure you only take on good debt, then knowing your DTI ratio is essential. Worryingly, however, our aforementioned survey showed that 39% of UK adults who are in debt don’t know what the term ‘DTI ratio’ means, and an even greater number (44%) don’t know what theirs is.

Working out your DTI ratio is quick and simple. And better yet, there are online tools that can calculate yours for you.

We need to talk about debt

Aside from the practical steps of understanding what constitutes good or bad debt, as well as calculating your DTI ratio, it’s equally important that people struggling with debt problems are able to open up.

Almost a quarter (24%) of the people KnowYourMoney.co.uk surveyed said they are losing sleep because of debt worries. While completely understandable, it is also something we as a society can and should do a better job of addressing.

The all-important first step is to talk more about the subject. And if an individual does not feel it’s possible to do so with those close to them, they can always turn to charities like StepChange, which provides support for indebted households. In the first six months of 2018 alone, more than 325,000 people contacted StepChange for help with their debt worries.

The worst thing to do when it comes to debt is to take the proverbial ostrich approach: bury your head in the sand. Not only must people proactively take steps to better manage their debt and keep a firm handle on their personal finances, but also culturally we must remove the taboo surrounding the word debt, enabling us to talk more openly about the topic and stop issues from escalating. 

• KnowYourMoney.co.uk is an independent financial comparison website run by a dedicated team, with the goal of providing clear, accurate and transparent comparisons for a range of financial products.