Choosing which debts to pay off first

One of the first things to do when prioritising your debts is identify those that are secured, and those that are unsecured. A secured debt is one for which you have offered up collateral, such as your mortgage or any other loan taken out against the value of your home. Any secured debts should therefore be at the top of your list. If you have to choose between keeping up repayments for secured debts or keeping up repayments for unsecured debts, prioritising repayments for secured debts should be a no-brainer - the consequences will be so much more severe if you neglect debts with collateral.

If you are in a situation where you cannot afford to keep up with the minimum payments for all of your debts, and have to make this choice between them, you should also seek debt management help immediately.

Expense is another way of ranking your debts in order of urgency. If you’ve got spare cash, it will inevitably be more cost-effective to put as much as possible towards your most expensive debts as this will free up more money in the long term to pay off cheaper debts. If you can afford to make overpayments on these expensive debts, and there is no penalty for doing so, this will be worth it in the long term.

However, do not make large overpayments at the expense of missing repayments for your other debts! Make sure you can afford to repay the minimum amount for all of your debts before splashing out to clear the biggest one.

To work out which debts are the most expensive, you need to know the rate of interest for all of your debts. If you don’t know this, you can check your debt statements or give your lender a call.

Yes, you should also consider the size of your debt. While it is naturally tempting to want to reduce the size of your bigger debts, it will likely be cheaper for you in the long term to pay off smaller debts with high interest rates, such as store cards. Clearing these quickly will allow you to focus on those debts that are larger, but with lower interest rates. So, large debts such as student loans or mortgages should not necessarily be your first priority when you have an influx of spare cash. Paying these off slowly is what is expected, as they are designed to be long-term.

When ordering your debts and considering their expenses, you might also want to look into whether you can reduce the cost of some of them. You could transfer high interest debts, such as credit card, store card or overdraft debts, onto a credit card with an interest-free or low interest transfer deal. By significantly reducing the interest you’re paying, you can free up money to put towards paying off the debt itself.

Moving current accounts with a lower overdraft interest rate is also something you might want to look into. Debt consolidation is always an option too, but research thoroughly before taking this step as it can be high-risk and surprisingly expensive.