Get In Control Of Your Debt

Without a plan, debt can add up and you could feel less in control of your finances than you’d like.  

By arranging your debts into a priority-based list, you can begin to plan your route out of debt and regain control of your finances.  

How to Prioritise Debt  

With different interest rates, loan totals, and minimum repayments, it can be tricky to understand the potential cost of each debt and how to reduce it.  

There are several ways to prioritise and pay off your debts. Be sure to assess each option and determine if the method is right for you.

Consider timeframe and overall cost, as well as how it will feel to live within your budget for the duration of the debt repayment period.  

Top Tip: It may be that you have to change your debt management plan to account for new factors, such as the birth of a new child or changing job. At such a time, you may return to paying the minimum monthly cost to each debt for a number of months until you can resume your debt management plan, or you may choose to increase your monthly repayments.  

Assess Your Debt 

First, identify your priority debts, non-priority debts, and living costs. Notice how often these are charged and how much they come to, and how much money you have left each month to budget from.  

Other than repaying your separate debts, there are also options around consolidation or defaulting on specific loans, bankruptcy, and more. Which of these is right for you will depend on your circumstances and may impact your credit rating.

Take a look at our Where to Turn For Help guide for free one-to-one debt advice and assistance in fully understanding your options. 

Your Legal Priorities 

There are debts which are considered high priority, such as paying your council tax and mortgage. These must be paid and falling into arrears can have huge repercussions.  

Other bills, such as utilities or credit cards are not considered high-priority debts and these providers will often give you some leeway in repaying.

This means that if you are struggling to pay the minimum monthly amount on all of these – and find yourself having to choose between paying the credit card bill or your mortgage, then you should pick your mortgage.  

If you are struggling to pay any of these, it is always best to call those companies up and explain your situation. There will be options such as temporarily lowering your minimum monthly repayments or deferring payment for a couple of months.  

If you’ve missed a payment, it can also help you to call the company’s helpline and explain. This could result in late-payment fees being voided and further lenience in future, at their discretion.  

Decide On A Plan 

When deciding on a debt repayment plan to follow, make sure to ask if it is right for you.  

Remember that as your circumstances change it may be wise to review your plan and perhaps decide on a new action instead.

Unless you are confident that you can maintain a strict budget over the entire dept repayment timeframe, you might want to consider more flexibility in repaying your debt, especially around gift-giving holidays. 

Method One – Debt Avalanche 

Examine your bills and their paperwork to understand the terms and conditions for each loan and the interest you are being charged on them.

Be sure to consider any fees which may affect your priorities. For example, some loans have prepayment penalties, which may make paying off these loans quickly less cost-effective overall.  In this case, it could be best to stick to the original timeframe, if the prepayment penalty is high.

Another example is credit cards can have annual fees that you can avoid if you have paid off the debt and then cancel the card. However, cancelling a credit card can adversely affect your credit score, too.  

If the interest rate of an account is subject to change, such as credit cards that have introductory rates, be sure to remember this and factor it into your plan, too.  Read the terms and conditions of your loans carefully to spot these potential hiccups.  

Then rank your debts by their interest rates – high to low. This is the order in which you’ll pay off the debts.  Once you’ve paid off the debt with the highest interest rate, move onto the next debt on your list until you are debt-free! 

This method is the fastest and most money-efficient way to pay off separate, multiple debts. In the meantime, while you’re focusing on paying off the highest costing debt, be sure to keep from incurring more debt by paying the minimum payments towards each of your other debts.  

Top Tip: When you’ve finished paying off a debt, instead of closing the account, consider keeping that line of credit open. If you do, then your credit score is likely to improve over time.  

Learn how credit scores work and why leaving open lines of credit can boost your overall score, leading to cheaper loans in future. 

Be sure to read the terms and conditions of your accounts. It may be that there is no fee for keeping the account open beyond the debt repayment period, or the annual fee is acceptable to you. 

Method Two – Debt Snowball 

Examine your bills and their paperwork to understand the terms and conditions for each loan, the amount owes on each account, and the interest you are being charge on them.

Be sure to consider any fees which may affect your priorities. For example, some loans have prepayment penalties, which may make paying off these loans quickly less cost-effective overall.  

In this case, it could be best to stick to the original timeframe, if the prepayment penalty is high. Another example is credit cards can have annual fees that you can avoid if you have paid off the debt and then cancel the card. However, cancelling a credit card can adversely affect your credit score, too.  

If the interest rate of an account is subject to change, such as credit cards that have introductory rates, be sure to remember this and factor it into your plan, too.  Read the terms and conditions of your loans carefully to spot these potential hiccups.  

Then rank your debts by the amount you owe – low to high. This is the order in which you’ll pay off the debts.  Once you’ve paid off the debt with the lowest amount owed, move onto the next debt on your list until you are debt-free! The next one will take longer to pay off than the first, but your total debt and number of debts overall will decrease faster and faster as you continue to pay them off – until you are completely debt-free! 

In the meantime, while you’re focusing on paying off the smallest loans first, be sure to keep from incurring more debt by paying the minimum payments towards each of your other debts.  

Compared to the Debt Avalanche method, the Snowball method is not the fastest or most efficient way to pay off separate, multiple debts. However, it might be the right plan for your circumstances. 

Top Tip! To speed up your debt repayment, see if you can pick up any additional money though increasing your hours at work, taking on a part-time job, or budgeting even more effectively. Without factoring any possible early repayment fees, the more you can put towards paying off your debts each month the better!  

You can create a debt timeline with the help of the Money Advice Service’s handy calculator tool to see when you’ll be debt free. Use this as a goal to stick to your budget and achieve your financial goals.