How to Prioritise your Debts
Having lots of debts can not only be a financial burden, but is also emotionally overwhelming. This is why it’s important to have a plan of how you’re going to pay each one off, and the time period you aim to do it in.
The first step to creating a plan is to prioritise your debts, and decide which ones to pay off first. This will also help you to save money and pay them off quicker.
Why it’s important to pay off debts in the right order
Paying debts off in the right order is critical, as the repercussion of failing to make repayments on some debts may be more serious than others.
If you’re struggling to make your repayments on time, you need to look at each of your debts and split them into three categories of importance:
- Non-priority debts
- Priority Debts
- Urgent debts
Urgent debts are when you are facing a sudden emergency as a result of your debt, such as:
- Court action
- Bailiff action
- Eviction for mortgage or rent arrears
If you are in a situation like one of those listed above, we recommend seeking free, independent debt advice urgently.
A debt adviser will be able to talk to the court, bailiff or creditor on your behalf, and give you advice on the best next steps to take.
As the name suggests, priority debts should be your main priority, as they will often have the most serious consequences if you fail to keep on top of them. Priority debts include:
- Court fines
- Tax (council, income and VAT)
- Child maintenance
- Gas and electricity bills
- National Insurance
- Mortgage, rent and any loans secured against your home
The repercussions of not making repayments on priority debts could be:
- Being visited by bailiffs
- Losing your home
- Receiving a court summons
- Going bankrupt
- Having your heating or lighting cut off
These are debts which do not carry as serious consequences if you fail to repay them.
However, don’t take that as a reason to get behind on repayments for these types of debts, as doing so could lead to your creditor eventually taking you to court or instructing bailiffs to collect the owed money from you. Failing to keep on top of these debts could also damage your credit rating, making it harder for you to borrow money in the future.
Non-priority debts include:
- Personal loans
- Credit card, store card debts or payday loans
- Banks or building society loans
- Money borrowed from friends or family
Water and sewerage bills are also regarded as non-priority debts but you should include them as essential household outgoings.
How to pay off non-priority debts faster
To avoid falling behind, you have to pay at least the minimum payment of each of your debts. However, if you can afford to pay more, allocate the additional cash in the following way to save money on interest costs and become debt free quicker.
Tackle the most expensive debt first
- Target the debt with the highest interest rate shown on your monthly statement or loan agreement first
- Ensure you won’t be charged any penalty or default charges for overpaying
- Pay as much as you can afford without breaking the terms of your other credit agreements
- Once you’ve cleared your most expensive debt, move on to overpaying on your next most costly one