Debt Glossary: A–Z of UK Debt Terms
The financial industry is full of jargon, acronyms, and complex terminology. When you are trying to get out of debt, this language can feel overwhelming and deliberately confusing.
We have built this glossary to explain the most common UK debt terms in plain, simple English. Whether you are looking at a credit card statement, reading a letter from a creditor, or exploring debt solutions, you can use this page to understand exactly what it means.
A
- Annual Equivalent Rate (AER)
- AER is used for savings accounts. It shows you what the interest would be if it was paid and compounded once a year. It is designed to help you compare different savings accounts easily.
- Annual Percentage Rate (APR)
- APR is the official rate used to show the cost of borrowing money on products like credit cards and personal loans. It includes both the interest rate and any mandatory fees or charges you have to pay, giving you a true picture of the cost over a year. The lower the APR, the cheaper the debt.
- Arrears
- If you miss a payment on a debt, bill, or mortgage, the amount you have missed is called “arrears”. For example, if your monthly payment is £100 and you miss two months, you are £200 in arrears.
- Attachment of Earnings Order
- A legal order that allows a creditor to take money directly from your wages to pay off a debt. Your employer is instructed by the court to deduct a set amount from your salary before it is paid to you.
- Avalanche Method
- A mathematical debt repayment strategy where you continue making minimum payments on all your debts, but direct any extra money toward the debt with the highest interest rate. This method saves you the most money and gets you out of debt the fastest. You can calculate your Avalanche timeline using the PlanMyDebt Calculator.
B
- Balance
- The total amount of money you currently owe to a creditor, including the original amount borrowed plus any interest and fees that have been added.
- Balance Transfer
- Moving debt from one credit card to a new credit card, usually to take advantage of a lower interest rate or a 0% promotional period. This can be a smart way to pause interest charges while you pay down the balance, but you must factor in the balance transfer fee (usually 1% to 3% of the amount moved).
- Bankruptcy
- A formal, legal debt solution for people who cannot pay back what they owe. If you are declared bankrupt, your non-essential assets (including your home) may be sold to pay your creditors. After a set period (usually one year), most of your remaining debts are written off. It has severe and long-lasting consequences for your credit file.
- Buy Now, Pay Later (BNPL)
- A type of short-term credit often offered at online checkouts (e.g., Klarna, Clearpay). It allows you to delay payment or split the cost into smaller instalments. While often interest-free if paid on time, missing a payment can result in fees and damage to your credit score.
C
- Charging Order
- If you have a County Court Judgment (CCJ) against you, a creditor can apply for a Charging Order. This secures the unsecured debt against your property. If you sell or remortgage your home, the debt must be paid off from the proceeds.
- Compound Interest
- Interest calculated on both the initial principal amount and the accumulated interest from previous periods. In debt, this means you are charged “interest on your interest,” which is why debt can grow so rapidly if you only make minimum payments.
- Consolidation Loan
- Taking out a single new loan to pay off multiple existing debts. The goal is usually to secure a lower overall interest rate and simplify your finances into one monthly payment.
- County Court Judgment (CCJ)
- A court order in England, Wales, and Northern Ireland that can be registered against you if you fail to repay money you owe. A CCJ stays on your credit file for six years and makes it very difficult to get credit, unless you pay the full amount within one month of the judgment.
- Credit Reference Agency (CRA)
- Companies that collect and hold information about your financial behaviour. The three main CRAs in the UK are Experian, Equifax, and TransUnion. Lenders use the data held by CRAs to decide whether to lend you money.
- Credit Score
- A number calculated by Credit Reference Agencies based on your financial history. It represents how reliable you are at borrowing and repaying money. A higher score means you are more likely to be accepted for credit and offered better interest rates.
D
- Debt Consolidation
- The process of combining multiple debts into a single payment, either through a consolidation loan or a balance transfer card.
- Debt Management Plan (DMP)
- An informal agreement between you and your creditors to pay back your non-priority debts at a rate you can afford. You make one monthly payment to a DMP provider (such as StepChange), who divides it among your creditors. It is not legally binding.
- Debt Relief Order (DRO)
- A formal, legal debt solution for people with low incomes, few assets, and debts under £50,000 (as of June 2024). If approved, your debts are paused for a year, and if your situation hasn’t improved, they are written off entirely.
- Default
- When you break the terms of a credit agreement, usually by missing multiple payments (often three to six months’ worth). The creditor will issue a “default notice” and close the account. A default stays on your credit file for six years and severely damages your ability to get credit.
E
- Effective Annual Rate (EAR)
- EAR is used to show the true cost of borrowing on an overdraft. Unlike APR, it does not include fees, but it does take into account how often interest is charged and compounded (usually monthly).
- Equity
- The portion of your property that you actually own outright. It is calculated by taking the current market value of your home and subtracting the amount you still owe on your mortgage.
F
- Financial Conduct Authority (FCA)
- The independent regulatory body that oversees and regulates financial services firms and financial markets in the UK. They ensure that lenders treat consumers fairly.
G
- Guarantor
- A person who agrees to pay a debt if the original borrower fails to do so. If you act as a guarantor for someone else’s loan and they stop paying, the creditor will legally pursue you for the money.
H
- Hire Purchase (HP)
- A type of vehicle finance where you pay a deposit and then make monthly payments. You do not own the car until the final payment is made.
I
- Individual Voluntary Arrangement (IVA)
- A formal, legally binding agreement between you and your creditors to pay back your debts over a set period (usually five or six years). You must owe at least £5,000 to £7,000 to multiple creditors to qualify. At the end of the IVA, any remaining unsecured debt is written off.
- Interest
- The cost of borrowing money, usually expressed as a percentage of the amount borrowed.
J
- Joint and Several Liability
- A legal term meaning that if you take out a joint debt (like a joint loan or a joint bank account with an overdraft) with another person, you are both responsible for the entire debt, not just half of it. If the other person stops paying, the creditor can chase you for the full amount.
M
- Minimum Payment
- The lowest amount a lender will accept each month without considering your account to be in arrears. Minimum payments are deliberately set very low (often 1% to 3% of the balance plus interest) to keep you in debt for as long as possible.
N
- Notice of Default
- A formal letter from a creditor warning you that you have broken the terms of your credit agreement by missing payments, and giving you a final chance to catch up before the account is defaulted.
O
- Overdraft
- A facility attached to your bank account that allows you to spend more money than you actually have, up to an agreed limit. Arranged overdrafts are agreed in advance; unarranged overdrafts happen when you spend past your limit without permission and often incur higher fees.
P
- Personal Contract Purchase (PCP)
- A popular type of car finance. You pay a deposit and make monthly payments that cover the depreciation of the car, not its full value. At the end of the contract, you can either hand the car back, trade it in for a new one, or pay a large final “balloon payment” to own it outright.
- Principal
- The original sum of money borrowed in a loan, or the amount still owed, excluding any interest or fees.
- Priority Debts
- Debts that carry the most serious consequences if you do not pay them. These include mortgages, rent, council tax, utility bills, child maintenance, and court fines. You should always pay priority debts before non-priority debts (like credit cards).
S
- Secured Debt
- A loan that is backed by an asset, usually your home or your car. If you fail to make the repayments, the lender has the legal right to repossess the asset to recover their money. Mortgages and car finance are secured debts.
- Snowball Method
- A psychological debt repayment strategy where you continue making minimum payments on all your debts, but direct any extra money toward the debt with the smallest balance, regardless of the interest rate. This gives you quick wins and builds motivation. You can calculate your Snowball timeline using the PlanMyDebt Calculator.
U
- Unsecured Debt
- A loan that is not backed by an asset. Credit cards, personal loans, and overdrafts are unsecured debts. If you fail to repay, the creditor cannot automatically take your property, though they can take you to court to get a CCJ.
Note: This glossary is for informational purposes only and does not constitute financial or legal advice. If you are struggling with problem debt, please contact a free, impartial debt charity such as StepChange or Citizens Advice.