What is debt?
Learn what debt is, when it becomes a problem, and how creditworthiness and repayment behaviour affect your financial situation.
Debt is commonplace in this day and age. From mortgages to phone contracts, many financial products involve borrowing. Debt becomes a problem when it's no longer manageable – learning how it works is a key step towards building confidence with money management.
What is debt?
Debt is money you owe to another person or company, usually with regular interest charged on top until it is repaid.
You acquire debt when you borrow money from a person or an institution and are required to repay it. You also have debt when you pay for a product or service afterwards. In most cases, you pay interest on a debt (see lesson 1.3.1).
As long as paying debts back doesn’t become an issue, it doesn’t need to negatively impact your life. In fact, some types of debt are so common that we barely think of them as debt at all. Take a mortgage or a student loan, for example.
When debt becomes problematic
Debt becomes a problem when you can no longer repay it (including interest). You may start receiving formal reminders from the creditor, and your costs can quickly increase. The costs of sending reminders and hiring collection agencies are usually passed on to you. As a result, your debt becomes more expensive and your situation can worsen.
If you consistently fail to repay your debts, you may even receive a court summons. In that case, you must appear before a judge. In situations where a collateral was used as pledge to secure a loan, the lender can sell the collateral when the borrower fails to repay the debt.
Fig. 1 How costs and consequences can escalate when debts are not repaid
Credit registration authorities
Even if your debts are not problematic, they still affect your financial situation. In many countries, certain loans and credit agreements are recorded by a credit registration authority or credit bureau.
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In the Netherlands, this role is fulfilled by BKR (Bureau Krediet Registratie)
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In Germany, SCHUFA performs a similar function
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In the United Kingdom, credit reference agencies such as Experian and Equifax maintain credit records
These organisations track your credit history and assess your creditworthiness — in other words, how reliable you are at repaying debt. You’ll learn more about the concept of credit in the next lesson. If you apply for a new loan while you already have debts registered, you may be eligible to borrow less, or even have your application rejected.
What is creditworthiness?
Creditworthiness is a measure of how likely you are to repay borrowed money, based on factors like your income, existing debts, and repayment history.
In the Netherlands, BKR registers debts of €250 and above. Not all types of debt are included in the register. What is and isn’t included in the credit authority registers in different countries varies, but in general, formal loans and missed payments are recorded, while informal loans are not.
Debts often registered with credit authorities (thus count against your credit score)
- A mortgage (a loan to buy a home)
- An agreed overdraft on your bank account
- Buying something in instalments, such as a phone you pay off monthly
- Car finance or a car lease agreement
- Business loans (in some cases)
- Missing payments on official loans or credit agreements
Debts that are usually not registered (and don’t count against your credit score)
- Informal loans from friends or family
- Some types of public student loans, depending on the country. In the Netherlands, student loans are not recorded.
These are also debts?
In each of the situations below, you're borrowing money or paying later — which means you have a debt.
⚠️ Your bank overdraft
If your account is overdrawn, this is seen as a debt to your bank. You’ve spent more money than was available in your account, and the bank has temporarily covered the difference. You’ll be asked to repay this amount, most likely with interest.
⚠️ Buy now, pay later
When you buy something and pay for it in monthly installments — for example a phone that comes with your subscription — you’re also essentially borrowing money. Until the full cost of the phone is repaid, you are in debt.
⚠️ Business credit
If you have a business credit card or another business credit facility with a spending limit, this counts as borrowing. In many countries, such agreements can be recorded by credit authorities, particularly if you are personally liable for the debt.
What to do if you have debt problems
Debt problems can escalate quickly, so it is important to respond as soon as possible. If you notice that you are struggling to repay your debts, take action straight away.
In general, you can:
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Contact your lender to explain your situation. Many lenders offer temporary payment arrangements or support options.
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Reach out to a free debt advice service or non-profit financial counselling organisation in your country. These services can help you understand your options.
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Contact your local authority or municipality. In many countries, local governments offer debt counselling or restructuring support.
If you live in the Netherlands:
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Contact Geldfit, a national starting point for questions and concerns about money.
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Contact your municipality. Dutch municipalities provide debt counselling and formal debt restructuring programmes.
Takeaways
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You have debt when you borrow money or buy something and pay for it later.
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If debt becomes problematic, the associated costs can rise quickly.
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If you’re struggling with debt, act early — it’s easier to fix problems sooner rather than later.
Peaks is an execution only service and does not provide financial advice.
Which of the following is not a debt?