How to prioritise your debts

By Marianne Curphey

If you have lots of different kinds of debts, it can be difficult to decide which one to pay first.

"It can be tempting to pay the company that hassles you the most or shouts the loudest," says Una Farrell, media relations manager of the StepChange Debt Charity. "But you need to prioritise."

If you don't prioritise wisely, you might wind up clearing your credit card debt, but ignoring your mortgage and losing the roof over your head.

"When we help people, we divide debts into priority and non-priority debts," says Paul Crayston, spokesman for the debt charity Money Advice Trust. "Priority debts include anything where you might lose something -- like your home or your electricity supply."

Because it can be hard to think clearly if your finances are spiralling out of control, we've created a guide that shows common debts, from the most to least time sensitive. prioritising-debts

1.  Mortgage, rent and loans secured against your home
Any bills tied to your home are the top priority because non-payment could leave you without a place to live. That places housing bills (and any loans secured by your home) above credit cards and even above intimidating bills like taxes.

"Although it is important to pay your council tax, it is a lower priority than your mortgage," Farrell says. "Because if you lose your home, it won't be an issue anyway."

The Building Societies Association and Money Advice Trust have a guide on what to do if you are struggling to pay your mortgage.

2. Overdue council tax, court fines, child maintenance payments, TV license or VAT
Failing to pay these could result in fines, a visit from bailiffs, an attachment of earnings order (which will siphon funds directly from your wages), seizure of property to pay down the debt and, possibly, imprisonment, according to StepChange.

However, there has to be a court order before bailiffs can come to take your things away, and even then, if you negotiate you may be able to stop them coming. Prison is a rare last resort. A debt counselling agency can help advise you.

Even if you manage to dodge the most severe consequences, council tax outstanding debt can bury you quickly. Normally, you're able to pay council taxes in 10 instalments. If you pay late, however, you lose that privilege.

3. Gas, electricity and telephone
If you don't pay up, you may lose the service but you won't face imprisonment as a consequence, according to StepChange. If you fall into arrears with these payments, contact your supplier who may help you put a repayment plan in place.

4. Non-priority debts such as credit cards, payday loans and water bills
It may seem surprising to see these debts so far down the list. Yet you won't go to prison for not paying off a payday loan or credit card bill, nor will vital services get shut off if you fail to pay a water bill.

Water companies, unlike gas and electricity companies, are not allowed to cut your supply off for non-payment, thanks to the Water Industry Act of 1999, according to Crayston.

"When we put together a debt management plan for people, we make sure that under the monthly payment scheme all the priority debts are paid first before non-priority debts like payday loans, credit cards and water bills," Crayston says.

Nevertheless, there are long-term consequences for your credit rating if non-priority bills go unpaid. Your credit rating will take a hit, and lenders will be reluctant to give you credit. If you miss a credit card payment, you could find the interest rate on your card increases, and you may have to pay a penalty fee or lose any low-interest introductory rate.

5. Student loans
If you have a student loan, you must provide the Student Loans Company (SLC) with the necessary information to automatically have payments deducted from your pay. Failing to do so, and failing to notify the SLC if you move abroad, can result in penalties added to your balance, according to a guide from the government. Repeated violations can even result in you being asked to repay the full amount of loan, plus interest and penalties, in one lump sum.

There are two important aspects that put student debt beneath credit cards on the priority list. First, if you took out a loan after 1998, unpaid student loans, unlike credit cards, won't show up on your credit reports or affect your ability to borrow money. However,  the SLC can still get a court order that compels you to pay -- meaning you could end up with a county court judgment on your reports, which would affect your credit.

Second, interest rates on student loans are far lower than those on credit cards. The current student loan APR is 1.5%, while the average credit card APR is around 17%.

Need more help?
If you are feeling under pressure from companies or bailiffs pressurising you for payments, contact a debt counselling charity.

"Once you are receiving help from a debt counsellor then creditors have to leave you alone while you sort out your finances," Farrell says. "They will help you set up a debt management plan which might mean that you make token payments instead."

Farrell also says it's important to know what bailiffs are and are not allowed to do. A debt counsellor could help you understand your legal position when it comes to bailiffs and the steps you needed to take.

See related: New rules set to curb aggressive bailiffs, New students face greater financial struggles

Published: 30 April 2013