How to start paying off your debts

How to start paying off your debts

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Paying off your debts might seem like a never-ending struggle, particularly if you’ve got debts from several different lenders. However, if you can figure out how to pay off debt out by sorting through which debts are more important to pay off and putting a plan in place. Once this is done, you can work towards a more stable financial situation and make your debt much more manageable.

How to pay off debt

Look at the difference between your priority debts (e.g. mortgage/rent, tax, bills) and non-priority debts (e.g. credit cards, loans, overdrafts). Prioritise your debts so that the most important are always covered, and then put together a budget for how you’ll pay off your other debts.

How to pay off debt

Look at the difference between your priority debts (e.g. mortgage/rent, tax, bills) and non-priority debts (e.g. credit cards, loans, overdrafts). Prioritise your debts so that the most important are always covered, and then put together a budget for how you’ll pay off your other debts.

Sort your debt into priority and non-priority

If you’ve got a few different debts you need to pay off, your first job is to figure out which debts are more important to cover. The consequences of not paying off certain debts can be far more serious than others, so you should find out what will happen if you don’t pay off each debt in time.

You can usually split your debts into three types:

  • Priority debts
  • Non-priority debts
  • Debt emergencies

Debt emergencies are slightly different from the other two, but this will be covered in a little more detail later in the article.

What are priority debts?

Priority debts are those that carry the most serious consequences if you fail to pay them off. This means that they aren’t always the largest debts or the ones with the largest interest rates, but that there could be severe punishments for people who don’t pay them.

Some priority debts include:

  • Mortgage or rent (including loans taken out against a home)
  • Gas and electricity bills
  • Income tax, National Insurance and VAT
  • Council tax
  • Child maintenance
  • Hire purchase agreements (e.g. financial payment plan for vehicles)
  • TV licence
  • Court fines

Should you fail to pay one of these debts, depending on which one it is, the punishments can include:

  • Being declared bankrupt
  • Losing your home
  • Having utilities turned off
  • Bailiffs reclaiming debts through payment or repossession of items
  • Receiving a court summons

What are non-priority debts?

Non-priority debts are most types of debt not included in the list above, including:

  • Credit card or store card debts
  • Loans (including payday loans, personal loans and bank loans)
  • Overdrafts

Try to put your non-priority debts into order based on the interest rates. While you should make sure to pay off at least the minimum repayment amount for all of these debts, target a few of the higher interest debts and look to pay off these faster, as that way you’ll be free of them sooner.

You should also consider how much the debt will end up costing you if you don’t get out of persistent debt. To find out more about persistent debt, check out our guide.

What about money I owe to friends, family and others?

When figuring out your non-priority debts, you should also factor in any money you owe to friends, family or other acquaintances. Although you might think that owing somebody money is a personal matter, if the other person feels like they aren’t going to be paid back, they can take you to court and have the court order the money be paid back.

In more serious cases, you could even be declared bankrupt or have your company liquidated if you can’t pay back the debt, so it’s important to treat debts owed to other people seriously.

Seek help for debt emergencies

As mentioned above, debt emergencies are very serious and have typically come about because of a failure to pay off other debts. Some debt emergencies include:

  • Court summons or actions
  • Bailiff actions
  • Disconnection of utilities
  • Eviction

If you find yourself facing any of these situations, you can get free, independent advice on what to do next. You can usually appoint a debt advisor who will speak to the court, bailiffs or any other relevant parties on your behalf at a hearing.

Should you be given a hearing to attend, make sure you attend in person as this will allow you to potentially come to an agreement on the repayment of your debt. In some cases, telling the hearing your side of the story (e.g. recent redundancies) might mean the hearing reaches a decision that works out better for you.

Below are a few organisations you can contact if you’re in a debt emergency along with a brief explanation of what they offer.

  • Citizens Advice - a network of charities that help with many different problems, including emergency debt
  • Shelter - a charity that helps people with homelessness or poor housing conditions
  • StepChange - a free debt advice service
  • National Debtline - a charity that gives free advice on debt
  • Gingerbread - a charity that helps single parents on a range of issues, including debt

Why you need to pay priority debts

Typically, priority debts won’t be affected by interest rates, but because the result of not paying them is far more serious than non-priority debts, you should make sure they’re always paid off before anything else. Although your credit card debt might creep up if you’re only paying the minimum repayment amount, this is all that can happen if you’re making this payment.

However, priority debts usually don’t have minimum repayment amounts, which means that if you’re putting other debts ahead of them, you’re likely to be hit with a serious penalty for missing the payment. For this reason, you should always try to pay off these debts first before looking at how much of your other debt you can afford to pay off each month.

If you find you’re struggling to work out how to pay off your debt or meet minimum repayments of non-priority debts, speak to the lender and explain your situation, as they’ll often work with you to sort out a more realistic payment plan.

Create a budget

Having a budget for several weeks or months is one of the best ways to make sure you start paying off your debts regularly. By figuring out a budget, you can see how much money you’ll have left after paying off your debts which will mean you can get a better idea of how much you can afford to spend. To plan your budget, check out our guide to creating a budget.

You can start budgeting for your bills by setting up a thinkmoney Current Account, as our accounts will set aside money for your bills every time you get paid, meaning you can spend your money knowing they’re already covered.