If you have more than one debt, it’s common to feel a little overwhelmed. This guide is intended to help you learn how to work out which debts need to be paid off first so that you can clear them more quickly and save yourself some money in the process. But why is it important to pay off your debts in the right order?
Simply put, there can be serious consequences to not paying off certain debts before others. If you feel like you’re always playing catch-up trying to make repayments on time, it’s helpful to split your debts into different categories:
- Urgent action required
- Debts that require urgent action
Sometimes, debt can cause you to face an abrupt emergency, such as:
- Court action
If you find yourself in one of these situations, it’s important to seek free, independent advice as soon as possible. A reputable debt adviser will be able to act on your behalf to speak to the courts, your creditor or a bailiff. They will also give you quality, actionable advice on what you should do next. If you have a court hearing, you should always attend. That is your opportunity to come to a new agreement.
If you fail to attend, a decision may be made in your absence, and you won’t have a chance to give any input regarding your circumstances. By turning up, you can tell the court about your situation to help them come to a decision that is more fitting for you. Advice organisations like Citizens Advice and Shelter can be provided by the courts to give last-minute advice. If you have less than 24 hours before your court hearing, ask if you can be provided with someone to speak to before your case begins.
What is a priority debt?
The debts that you should give priority to are the ones that have the most severe consequences for not paying. It doesn’t necessarily have to be the largest debts, or those with the highest interest rates. Instead, prioritise those that could cause serious problems if you don’t pay.
You should prioritise:
- Court fines
- Television licence
- Council tax
- Child maintenance
- Energy bills
- Mortgage/rent/loans secured against your home
- Income tax/national insurance/VAT
- Hire purchase agreements for essential items
Priority debts need to be paid off first because failure to do so could land you in serious trouble. Perhaps you would get summoned to court or visited by bailiffs. You might have to declare yourself bankrupt, or you may have your electricity or gas cut off. In some circumstances, you could even lose your home.
So what is a non-priority debt?
Non-priority debts are the ones where the consequences for non-payment are less serious. By failing to pay non-priority debts, creditors could eventually go to the courts are send out the bailiffs, but the threat of that is not imminent. Non-priority debts include things like:
- Personal loans
- Bank loans
- Credit card debts or payday loans
- Loans from friends/family
You should also treat debts relating to water and sewerage bills as non-priority, but they are essential household expenses. They are an ongoing service that must be paid for, and if you don’t pay them then the amount you owe will continue to rise.
Paying off non-priority debts faster
You should aim to make at least the minimum payment on every debt so that you don’t fall behind. If you have the budget to pay more than the minimum, spread out that surplus cash in the following way to get through your debts more quickly:
- Prioritise the most expensive debt first.
- Target the debt that has the largest interest rate.
- Ensure there are no additional charges for overpaying.
- Pay as much as you possibly can, ensuring you don’t breach the terms of any other credit agreements you have.
- Once the most expensive debt is cleared, move on and follow the same process for the next most expensive one.
Finding free debt advice
There’s no need to drown in your debts, especially when a debt emergency like an eviction or court summons comes up. If you feel like you don’t know where to start, or you need support, you’re not alone. A large portion of people in debt feel uncertain about the best way to clear their debts, and this is the time when a debt adviser can be a big help.
Seeking debt advice can really help ease the stress and help you feel more in control of your life. If you procrastinate on getting advice, your problems are likely to get worse. You may find:
- You’ll be unable to get loans anywhere else
- Your cards become maxed out
- It takes much longer to pay off what you owe
- The problems snowball and get out of control
Advisers can be contacted in a way that works for you, meaning meeting in person, over the phone or online. Seek help today and take the first step on the journey to being debt-free.