Step one: Prioritise your debts
First things first: work out how much you owe. If you've got credit cards, get all of the statements out and list their balances. Now write down how much your overdraft is. And very importantly – make sure you list down the Annual Percentage Rate (APR) payable for each, too (you can find this out from your statements).
Now, have you any other borrowings that need to be included – loans from family/friends?
Once your list is complete, rank them in order with the one with the highest APR first. Reason being that as it has the highest interest rate it is the one growing the fastest. So regardless of how much this debt is, this one must be dealt with first!
Getting your priorities right
If you are struggling to meet all your bills, bear in mind that even though some debts, like your mortgage, might be cheaper than others, they are more important to stay up-to-date with.
For example, you should always prioritise meeting your mortgage payments before your credit card payments, as if you fail to keep up with your mortgage payments you are immediately risking the roof over your head.
Similarly, you can get sent to prison for non-payment of Council Tax whereas you can't for defaulting on your credit card.
Your mortgage and your Council Tax should always be your top priority debts, regardless of how cheap they might be and the snowballing system. Other priority debts include:
- The rent – the landlord could get a court order to evict you
- Income Tax – you could be made bankrupt
- Fuel bills – your gas or electricity could be cut off
- Phone bills – the phone could be cut off
Examples of secondary debts which you can safely snowball include:
- Unsecured loans
- Credit cards
- Hire Purchase Agreements
- Store cards
- Catalogues and other Mail Order debts
Obviously these secondary creditors can't be ignored but there's usually more flexibility to negotiate if you get into trouble. Organisations such as the Consumer Credit Counselling Service and Payplan can negotiate with your creditors on your behalf and help you to set up a debt management plan.
Note, however, that anyone to whom you owe money can make you bankrupt if you owe them more than £750 so even secondary creditors will need to be dealt with at some point!
The next step
Once you've identified which debts are your top priorities, you need to work out how much money you have left over each month to throw at these debts.