What debts should I pay first? How do I choose?

Trying to manage debt can sometimes feel like facing a messy bedroom that you’re supposed to tidy. It can fill you with dread and feel overwhelming, and it’s tempting to shut the door and try to forget about it.

But the task can be made easier by assessing the situation as a whole and identifying both the top priorities and the quick wins. Let’s dive into practical tips to help you tackle your debts effectively.

Three top tips

Understand the types of debts

Not all debts are created equal. In the UK, debts generally fall into two categories: priority debts and non-priority debts.

Priority debts, if unpaid, lead to one of three outcomes – being evicted from your property, being cut off from essential services or going to court. So, typical priority debts include rent or mortgage arrears, council tax, gas and electricity bills, and court fines.

Non-priority debts are typically unsecured debts like credit card debts, personal loans, and payday loans.

Understanding the distinction between these two categories is essential when prioritising your repayments. So, take the time to list your debts and mark which fall under priority debts and non-priority debts. 

Assess the consequences

Consider the consequences of not paying each debt and make a note for each debt on your priority and non-priority lists.

As mentioned, falling behind on priority debts can lead to serious outcomes, such as eviction or going to court. Therefore, it’s important to prioritise these debts.

If you’re struggling to make payments on priority debts, don’t hesitate to seek assistance from support organisations or creditors who may be able to offer repayment plans or other forms of support.

On the other hand, while non-priority debts are still important to repay, missing payments may not have immediate consequences. However, ignoring them can still damage your credit score and lead to increased interest charges, which can cause the debt to grow rapidly. 

Focus on high-interest debts first

As a final step to help you order which debts to pay first, take your lists again and note down each debt’s respective interest rate.

High-interest debts can quickly spiral out of control if left unchecked. Therefore, it’s wise to work on paying off debts with the highest interest rates first.

So, allocate extra funds towards repaying the debt in your priority debts list with the highest interest rate while making minimum payments on other debts. Once the highest interest debt is paid off, move on to the next one on the list.

This strategy, known as the “debt avalanche” method, can save you a significant amount of money in interest payments over time. 

In conclusion, prioritising debt repayment requires a clear understanding of the types of debt you have.

By focusing on priority debts with serious outcomes first, and then ranking them by high-interest rate, and seeking assistance when needed, you can take control of your finances and work towards a debt-free future.

Remember, small steps today can lead to significant financial freedom tomorrow.

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