Which Debt Should I Pay Off First?

Where to start with paying off debt?

Paying off debt is not easy, particularly if you have multiple debts or can only afford to pay the minimum payments each month. Therefore, when creating a plan to start paying off debt, you should always look to repay the debt that is causing you the most problems.

There are multiple debt solutions and budgeting strategies available to help you prioritise your debts and work towards a better financial future. For example, debt consolidation loans are a particularly effective way of dealing with multiple debts, and really simplifying your debt repayments.

Which debts should I pay off first?

When deciding which debt to pay off first you must look at which debt will cause you the most problems if it goes unpaid. Typically, the debts that will affect you the most if they are not paid are secured debts such as mortgages, council tax arrears, and utility bill arrears. Making payments on priority debts is more important than making payments on other debts like credit card debt and unsecured personal loans.

Here is a small list of debts you should always pay off first if you can:

Mortgage payments

If you are in arrears on your mortgage payments, you should pay this as soon as possible. This is because a mortgage is a priority debt. The reason why mortgage payments are so important is that this type of loan is a secured loan, meaning it’s secured against an asset and in this case, your home. If you fail to meet repayments, they may threaten to repossess your home.

Council Tax Arrears

Council Tax arrears are often not taken as seriously as they should be but unpaid council tax can follow you long after you’ve moved out of the property. The council will be quick to issue you with a County Court Judgement (CCJ) and take you to court to get the money if you don’t pay. Ignoring council tax arrears can end up costing you a lot more money than the original bill as they’ll charge you court fees if it ends up going to court.

Utility Bill Arrears

Utility bills are a high priority bill. The UK government isn’t going to cut off your electricity, gas, or water, but that doesn’t mean you don’t need to pay them and that they won’t take missed payments seriously. Your providers may take you to court if you don’t pay and they could even send bailiffs to repossess your belongings to cover the costs.

How to prioritise debts

Trying to work out a plan to pay off any outstanding balances can be difficult, and it can be even more difficult to know which debt to pay off first. You should always aim to prioritise your debts – but where do you start? After you’ve noted the bills, we mentioned above as the most important debt to pay off first, you can start looking at your other debts.

Here are some key things you should do to prioritise other bills or debts:

• Look at interest rates
• Look at the APR (Annual Percentage Rate)
• Look at outstanding balances
• See if the creditors are threatening any serious action against you

Which debts are low priority?

When working out which debt to pay off first, there are some debts that would be considered low priority.

Here is a few examples of low priority debts:

Student loans

In the UK, many of us take out a student loan when we go to university and with the maintenance loan as well, this debt total can soar over £50,000.

Although this total is high, student debt is considered a low priority because it’s deducted from your wage when you start the government deems, you’re making enough money to pay it back. It will be a small amount each month that you probably won’t notice and comes out of your pay before you get it. You won’t have Student Finance chasing you to pay back your student loan unless they believe you’re working and not telling them.

Managed credit card debt

What do we mean by managed credit card debt? If you’re comfortably making minimum payments towards your credit card, then this can be considered a low priority. While it would be nice to pay off your credit card balance in full every month if you’re dealing with other debts and happy making minimum payments then your focus should be on your other bills.

Managed consumer credit

Consumer credit is a great way to purchase things you wouldn’t be able to afford outright such as TVs, laptops, and furniture. You might have a total debt of £1000, but if you’re meeting your minimum monthly payment then you should focus on other more important debts.

The debt avalanche method

The debt avalanche method is a strategy for paying debts that some people use if they feel they can manage their financial situation without professional help.

What is the debt avalanche method?

The debt avalanche method is also commonly known as the highest interest method. It involves making minimum payments on all debts and putting any extra money into paying the highest or high interest debt off quicker. Once the highest interest debt is paid off you move to the next debt with a high-interest rate and charges.

If you think this sounds like something you could do to manage your repayments, this is how you get started in using the avalanche method to repay your debts:

• List all of your debts and work out which one has the highest interest rate
• Meet the minimum payments on all your other debts including your highest interest debt
• Use any leftover money and put it into your highest interest debt
• Continue this until the debt has been fully paid
• Move onto the next highest interest rate debt and repeat the process

This can be a useful method for dealing with debts alone but it only works if you have enough money to afford all the minimum payments towards your debts with money left over.

The debt snowball method

The debt snowball method is another strategy for paying debts that some people use if they feel they can manage their financial situation without professional help, the key difference is that it focuses on short term goals.

What is the debt snowball method?

The debt snowball method is when you pay off first your lowest debt – the debt that is most attainable to being paid off. Like with the debt avalanche method, you continue to pay the minimum payments on all your other debts and use any money left over to pay into your lowest debt.

This can be tempting as it shows quick progression, but it won’t help you to avoid paying high interest payments.

Paying off debt with a debt consolidation loan

Can I reduce the cost of my debts with a Debt Consolidation Loan?

It may be possible to reduce your monthly repayment through a debt consolidation loan. You won’t be reducing the total cost of your debts but you may be able to pay back less each month in total, meaning you’ll have more money left over for the things you enjoy, and you may have a lower interest rate. However, it could mean it takes you longer to pay back your debts.

With a debt consolidation loan, you can pay off all your unsecured debt and start paying back just one creditor. You can include unsecured debt such as personal loans, payday loans, credit card debt, and store cards.

What should I look out for when paying off debt?

When you’re paying off debt, it’s important you know all the information and that your creditor is being transparent with you.

Make sure you ask:

• How much you owe
• And proof of the debts

Your debts will grow as interest rates and other charges may apply so it’s necessary to keep on top of what you owe so that there won’t be any disagreement between you and the creditor later.

How to pay off debt sooner

To pay off debt sooner, you need to be paying more than just the minimum each month. This will shorten the length of your loan. But not everyone is able to do that. If you want to pay off debt sooner but can’t afford to make more than the minimum payments, you can try:

• The debt avalanche method
• The debt snowball method
• Strict budgeting
• Debt solutions such as a debt consolidation loan, a debt management plan, or an IVA

If you have creditors hassling you, you might be keen to pay off debt sooner but with a debt consolidation loan, you can stop creditor harassment altogether. We will deal with your creditors for you, so you don’t need to worry about them knocking on your door, demanding payment.

Key points to take away

• Write down all of the debts you owe and prioritise them - consider their interest rates and how much you're being charged to have them
• Make sure you prioritise mortgage payments, council tax arrears, and utility arrears
• Try a debt repayment method such as the debt avalanche method
• If you can't afford a debt repayment method, consider a debt solution