How To Prioritise Your Debts

No matter whether you are attempting to cut down the credit card, manage your student loan or get a kick start on the car loan, paying off money you owe is, and forever will be, a noble cause. But, by enforcing the appropriate methods, ditching certain debts is possible. How you ask? By prioritising your debts. It’s not as complex as it sounds – either. In fact, it’s easy when you know where to stash your extra cash.

Identify the kind of debt you’re dealing with

The first step to prioritising your debt involves knowing what kind of debt you’re dealing with. Whist the money you borrow to buy a property or for educational purposes is considered “good debt” since they help boost your financial position, other forms of debt aren’t as beneficial. If you are lucky enough to be in “good debt”, there’s no need to fret and put unnecessary pressure on yourself to repay those loans immediately. As long as you can continue making monthly installment payments, there’s no need to panic.

However, “bad debt” on the other hand, is an entirely different story. “Bad debt” is identified as being anything that doesn’t improve your financial position, and fees that you are unable to pay for in full within a couple of months, whether it be a fancy meal in a Michelin-Star restaurant or top-of-the-range gadget. Usually, bad debt is in the form of a personal bank loan or credit card debt, so it is vital to tackle this first!

Decide what will give you the biggest boost

If you forgot or ignored watching your credit card balances before they spiralled out of hand, the next step to prioritising your debts effectively is deciding what will give you the biggest boost. From a financial perspective, it’s better to pay off your high-rate “bad debt” first – right? For instance, putting £500 towards a £3,000 credit card bill with an 18% interest rate will save you much more than paying off a £500 debt at 6%. However, it may be worth repaying a smaller debt first if you feel as though it will put your mind at ease. It’s entirely down to what you feel comfortable with doing! Nevertheless, looking at loans and other forms of credit that are supposed to be for the short-term, means you should prioritise paying these off first.

Consider your credit score

No matter whether you are planning to buy a car or a home in the near future, it may be worth clearing any existing credit cards that are close to their credit limit.  Not only will reducing your “utilization ratio” have a positive impact on your credit score, but it also holds the potential to qualify you for lower interest rates. It really is a win-win situation!

Finding the best solution for you

As with everything, there are different solutions that work better for some than others. Not everyone is in the same situation, and not everyone is born with the same psychology, nor do they experience the same obstacles or get handed the same opportunities. Because of this, it is essential to choose the best path for you. As hard as it might be to cut back on personal spending and using that money to supplement your debt, everyone will handle it differently. But remember, no matter how you decide to prioritise your debts, making additional payments to the top debt on your list will do far more than having your list in perfect order.

Generic advice is not a service regulated by the Financial Conduct Authority.