These days, when money is tight for many of us, keeping up with your debt repayments can be a struggle.
If you owe money on your mortgage/credit card/store card/personal loan, and you still need to pay all of your household bills on top, it can become extremely confusing when trying to decide how you’re going to tackle them all.
If you’re really struggling to pay off all of your debts, you might think your best bet is to simply focus on your most expensive debts first, and worry about the others later. And in fact, when it comes to things such as credit card debts, we do often suggest this through snowballing.
By paying off the most expensive debt first – ie. the one that is racking up the most in interest – you’ll be saving yourself a lot in interest payments. And once you’ve tackled that one, you can move onto the next most expensive. So it can be a very sensible way of dealing with your debt.
Unfortunately, however, if you’re using this method across all of your debts, this can actually work against you. That’s because some debts are ‘priority debts’ which simply means these are the debts where serious action could be taken against you if you don’t keep up with your repayments.
Priority debts
Priority debts include the following:
- Rental payments – if you don’t keep up with these, your landlord could get a county court order to evict you.
- Mortgage payments – if you don’t keep up with your payments, your lender can ultimately take possession of your home.
- Council tax – you might hate paying it, but if you don’t, you’ll be summoned to court and this could lead to imprisonment.
- TV licence - if you don't keep up with your payments, you will be fined and this could ultimately lead to imprisonment.
- Income tax, National Insurance and VAT– you could be made bankrupt if you don’t pay this. In serious cases, it could lead to a prison term.
- Court fines - if you don't pay up, this could lead to a visit from the bailiffs or even imprisonment.
- Child support and maintenance - again, not paying this could result in a visit from the bailiffs or in the worst cases, imprisonment.
- Utility bills – if you fail to meet your payments, your gas and electricity could be cut off and legal action could be taken to recover the costs.
- Phone bills – again, if you don’t meet your payments, your phone line could be cut off.
- Essential Hire Purchase agreements – if you don’t keep up with these, you could have your car, washing machine, etc recovered.
These are the debts you really do need to keep on top of, with your mortgage, council tax, TV licence and court fines being top of the list.
Non-priority debts
In comparison, examples of non-priority debts include:
- Unsecured loans
- Credit cards
- Store cards
- Water bills
- Catalogues and other mail order debts
- Overdrafts
- Non-essential Hire Purchase agreements - eg. for a TV.
Obviously these debts shouldn’t be completely ignored – after all, they are still debts that need to be paid. However, with these secondary debts, there’s usually more flexibility to negotiate with your lender if you’re struggling to keep up with your repayments.
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You should be warned though that you could still be issued with a County Court Judgment and if you owe a creditor more than £750, that creditor can still make you bankrupt, so you do need to deal with them!
Credit rating
It’s also important to note that if you’re missing payments on your debts (whichever category they fall into), this will have a negative effect on your credit rating. Ultimately this will impact whether or not you’re accepted for credit in the future. Any late payments will remain on your credit report for at least three years.
What’s more, if you have a promotional deal on your credit card – such as an interest-free period – and you then miss a payment, your credit card provider may decide to withdraw this promotional period, and your interest rate will suddenly jump to around 16%. As a result, you’ll end up forking out even more money. So it’s important to try and keep up with the minimum monthly repayments.
If you’re concerned about your credit rating, you can sign up for a free trial period with Experian to work out exactly where you stand. Just remember to cancel your membership before the 30-day trial is up, to avoid being charged in the future.
If your credit rating isn’t up to scratch, however, there are measures you can take to improve it. You can find out more in 10 steps to a perfect credit record.
What to do
If you are struggling to keep up with your repayments on any of your debts, the very first thing you should do is speak to your lender. Believe it or not, in some cases, your lender may agree to come to some kind of arrangement with you to make meeting your repayments a little easier.
You should then focus on meeting the repayments for your priority debts.
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See the guideIt’s also well worth seeking free advice from a debt charity such as the Consumer Credit Counselling Service (CCCS), Citizens Advice or The National Debtline. You can find out more about these in Get debt advice for free.
These organisations can negotiate with your creditors on your behalf and help you to set up a debt management plan. And if you’re really in difficulties, they can even help you to discuss your options if you need to file for bankruptcy.
Whatever you do though, don’t bury your head in the sand and hope your problems will go away by themselves. They won’t. There are people out there who can help you to tackle your debt head on and make it more manageable, with a view to ultimately clearing it. So do use these services. And don’t forget to also check out our Dealing with debt blog, written by CCCS.
It’s also well worth reading The best ways to get out of debt. Good luck!