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Prioritise Your Debts
Funnily enough, your biggest debts are not necessarily the most important ones to pay off!
Of course, it is important to pay back all debt so that you can spend your money on whatever you want in the future. However, unless you’ve just won the lottery, paying them all off at the same time might be an unrealistic approach.
First of all you need to figure out which of your debts are 'priority debts' involving serious action being taken against you if you don't pay what you owe. These may include:
| Type | Penalty |
|---|---|
| Rent or Mortgage and Secured Loans | Lender or Landlord can repossess the home |
| Council Tax | Council can use bailiffs, attach benefit or wages and apply for committal to prison |
| Utility Bills | Your supply could be disconnected |
| Magistrates' Court Fines | Bailiffs collect unpaid fines. If you refuse to pay this could lead to imprisonment |
| HP/conditional sale, rented and hired goods | Repossession of goods (this could include your car) |
| Business Rent | Premises can be repossessed |
| Business Rates | Bailiffs/imprisonment |
| Income Tax/VAT/National Insurance | Bailiffs/imprisonment |
| TV Licence | Fine of up to £1,000 |
Bailiffs, Repossession?, Prison?. Scary stuff when you look at it like that isn't it? So to avoid your life turning into a soap opera, it is important to make sure you are aware of the order in which to repay your debts.
Mortgage and Rent payments are at the top of the list. Failure to pay can lead to loss of your home, which is the last thing you want. Also utility bills such as gas, electricity and water are very important because if you do not pay them the utility companies may cut off your supply.
Next are loans and hire purchase debts that have been taken out for important household items because if you have paid off less than a third of the cost, they can be repossessed without a court order.
Ones to keep on the back-burner
- credit card or store card arrears
- catalogue debts
- water rates arrears
- bank overdrafts and loans
- personal loans with finance companies
- loan shark loans
- money borrowed from friends or family
Least important to pay off quickly are loans for holidays and unessential luxury items.
Repayment of credit card debt can also (usually) wait a little longer as most credit card companies are quite agreeable if you let them know that you are in trouble as soon as you can. If you call them and let them know that you need either deferment or lenience, they might help you to work out a payment plan by temporarily lowering your minimums or deferring payment for a couple of months until you are working again, etc. However, if you just ignore the problem and let it get worse they might be less agreeable.
And remember . . . credit card debts need to be paid off eventually or you will not get credit in future.
It depends on your situation . . .
The strategy you use to combat debt should be appropriate for your situation – sometimes it is advisable to pay everything at once, other times it is essential that you prioritise your debts and make repayments in order of urgency and according to interest rates.
Determine what strategy you need. If you're living comfortably and securely, your goal should be to prioritize your debts so as to pay them off as quickly as possible. If you're just barely scraping by, however, you should prioritize to make sure you have the necessities now while trying to minimize potential problems down the road. Each situation requires a different ordering of your priorities.
- Strategy 1: Pay off debts fast. Debts can most quickly be paid off using a "snowball" technique
- Put your debts in order from the one with the highest interest rate to the one with the lowest.
- Pay the minimum monthly payments on all your debts except for the one with the highest interest rate. Make sure to keep all your accounts in good standing.
- Pay as much as you can on the first debt. In general, the quickest way to pay off all your debts is to first pay off the debt with the highest interest rate (usually a credit card or personal loan), so each month you'll want to pay as much as possible on that debt.
- Focus on the debt with the next-highest interest rate once you've paid off the one with the highest rate. Once you've paid off that one, proceed to the next-highest, and so on until you're debt-free.
Pick up vouchers or use the new applications available for scanning your groceries so that you have a list and are not tempted to buy more than you need – buy to replace rather than just because you fancy something
,p>If you would like more advice on prioritising your debt or would like some guidance, you can ask one of our debt advisors any question you like (preferably relating to debt management) for free and receive an answer within 60 minutes – it really is as easy as it sounds and much quicker than trawling through internet pages to find an answer.No Obligation
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