How to Prioritise Your Debts
When you have numerous debts and are struggling to keep up the repayments it can quickly become overwhelming.
Been there. Failing to manage my finances impacted every area of my life. My marriage, my health, and my happiness.
The consequences of not paying off some debts before paying of others can be serious.
Why it’s important to pay off debts in the right order
If you are struggling to make your repayments on time, you need to look at all your debts and split them into –
- priority debts
- non-priority debts
- debt emergencies
A debt emergency is when you are facing a critical situation such as –
- eviction for rent or mortgage arrears
- court action
- bailiffs at the door
- disconnection of services
- facing bankruptcy
A bit of tough love here. You need to stop burying your head in the sand and get help, No matter how overwhelming the thought of that is.
Being late paying your bills, unable to pay your bills or facing bankruptcy does not describe who you are as a person.
Whatever got you in this situation will not define the rest of your life. You will pull yourself out of this and get this under control. Stop thinking of yourself as a victim and start thinking of yourself as the person who will change their life and never be in this situation again.
Get free independent debt advice urgently. There are many ways to do that. Phone, email, webchat, or one-2-one appointments.
A debt adviser will be able to speak to the court, bailiff or creditors on your behalf. They will be able to advise you on what to do next.
Always turn up to a court hearing. It gives you a chance to come to an agreement. If you don’t go, a decision might be made without considering your personal circumstances.
People can only help you if you let them know what is going on. If you are there you can let the court know what’s happening, it might help them to reach a decision that is better for you.
What are priority debts?
Priority debts are those that carry the most serious consequences if you don’t pay them.
They don’t have to be the largest of debts with the most expensive interest rate, but if you don’t pay them it could lead to serious problems.
Priority debts include –
- mortgage or rent
- any loan secured on a property
- council tax
- child maintenance payments
- gas, electric or water bills
- TV license
- Tax, national insurance or VAT bills
- Hire purchase agreements
Why you should pay off priority debts first
The consequences of falling into arrears with these debts can be far more serious.
- You could lose your home
- Failure to pay council tax may mean an additional fine or prison sentence
- You may face a court summons and risk a County Court Judgement (CCJ)
- Visited by a bailiff to enforce the CCJ
- Risk having goods removed and sold
- An order made to deduct money from your pay
- Your gas or electricity cut off
- Losing goods on the hire purchase agreement
All debts are likely to incur additional charges and/or interest if you are late paying. This means, ultimately, you end up owing even more.
Keeping in contact with the companies you owe money too, can be the first step to resolving the debt. Often companies will agree a payment plan, lower interest, or waive fees. If you don’t talk to them they can’t help you.
What are non priority debts?
- Credit cards, store cards, shopping catalogues
- Bank or building society loans
- Money borrowed from family or friends
- Payday loans
How to pay of non priority debts faster
You must pay the minimum payments on all debts to avoid falling behind. Making the minimum payment and on time will mean you avoid further fees and additional interest.
Payday loans have crazy high interest charges, usually applied daily, and then more interest on top of that. Although recent regulation has targeted payday loan companies it’s still an incredibly expensive form of debt.
I would recommend making minimum payments on all other non-priority debts and clearing the payday loan as soon as possible. If you are struggling seek help. The sooner you do the less charges and fees you will have to face.
Once payday loans are out of the way there are two ways to approaching the remaining debt –
- Target the most expensive debt first
- The snowball method
There are advantages to both. They both require you to pay the minimum payment, on time to all non-priority debts. Any remaining money goes towards the most expensive debt.
By targeting the most expensive debt, the debt with the highest interest rate (not the highest outstanding balance) you can try and clear this first. As a result you may pay less interest.
On the other hand, the snowball method puts any extra towards the smallest balance of debt first. Meaning you will quickly get rid of that debt. The additional money then rolls up to the next smallest balance .
If you aren’t sure which option is for you, check out this useful budgeting for beginners advice. Or seek free help.
Don’t struggle with your debts – particularly if you’re facing a debt emergency, such as losing your home or court action.
Dealing with debts doesn’t need to be stressful or insurmountable. It’s simply a matter of taking action, prioritising your debts, asking for help if you need it, and sticking to a budget. You can do this!!