The consequences of you not paying off some debts before other debts can be serious. If you are struggling to make your repayments on time, you need to look at all your debts and split them as follows:
- Debt emergencies.
- Priority debts.
- Non-priority debts.
Priority debts are not necessarily the largest or most expensive debts or necessarily with the highest rates. Priority debts are the ones you must pay off first given that if you do not pay these debts you could end up:
- Losing your home – because you are not keeping up mortgage or rent payments.
- Being made bankrupt – because you have not paid your tax bills.
- Having your heating or lighting cut off – because you have not paid your energy bills.
The debts you should pay first are:
- Mortgage, rent and any loans secured against your home.
- Income Tax, Social Security Contributions and VAT.
- Child maintenance.
- Hire purchase agreements if what you have bought is essential to you.
If you can afford to pay more than the minimum payments on your non-priority debts, there is a general rule about which one to overpay first, or next. The rule is that you target the debt with the highest interest rate shown on your monthly statement or loan agreement first.
The following are considered to be non-priority debts:
- Credit card, store card debts or payday loans.
- Catalogue, home credit or in-store credit debts.
- Bank or building society loans
- Personal loans
- Money borrowed from friends or family.