One finds it hard to choose the right debt to pay first. This is especially true with multiple debts lined up. You may have set direct debits according to your affordability for some debts. However, limited financial flexibility restricts you from setting direct debits for every debt. Here, you might get confused regarding debts for which to set direct debits.
For example, you have debts like- payday loans, credit cards, car loans, utility payments, etc. You may have car loan payments on direct debit, but skipping payments on payday loans is not ideal either.
Thus, prioritising implies- paying those debts that help you improve your lifestyle and achieve another goal quickly. By paying a car loan first, you can seek a home improvement loan (if you are seeking one). A car loan is a secured loan. Thus, one should pay for secured loans first rather than unsecured ones. This is especially true when the agreement is about to end.
Similarly, if you often struggle with sorting out debt payments, the blog may help. It lists the strategies to understand and prioritise debts and plan accordingly.
7 Strategies to spot the most important debts to clear first
If you constantly Google “what debts to pay first”, you have landed right. Most experts believe one should first pay debts with a small balance. However, some believe that interest and penalty costs also impact the decision to pay the debt. The following strategies answer it. Read ahead to clear debts and ensure financial freedom quickly:
1) Categorise debts
The most important part of debt clearance is understanding your liabilities. Categorise the debts that your credit report reveals according to multiple parameters. You can divide debts into- debt type, interest costs, penalty costs, the total amount to pay, risk involved and impact on credit score. Such an arrangement will help you understand your debts better. It will help you identify and plan the best way to settle debts.
2) Pay debts with small balances first
Here is your answer if you ask whether to pay a high-interest debt or one with low balances first. You should pay debts with low balances first. This model is known as the avalanche debt payment method. Here, one begins by settling the debt at the lowest cost.
It is because paying debts with affordable balances is easy for an average earner. It helps settle most of your debts, such as utility bills, overdrafts, energy costs, grocery payments, etc. Make a list of debts smaller than €5000 and budget for it. It is the best way to clear small balances quickly.
However, following a budget with an average income is challenging. If you encounter a medical emergency, your debt payments will be affected. Instead of using savings, get quick loans in Ireland‘s marketplace. It restricts you from affecting the payment pattern and preventing emergencies quickly. Don’t worry. Such a small loan would not hamper your debt management and clearance goal. Easy and small monthly payments are feasible with ongoing liabilities.
3) Consider debts with high interest rates
After paying the small balance utilities, consider debts with high-interest costs. Check and compare the debts with the highest interest costs and fees. Late payments involve penalties. It makes the debt costly. However, delaying the payments further may make it challenging for you. Thus, plan out and begin with the debts having the highest interest costs and payments.
However, consider good and bad debts here. Certain debts like- mortgages and student loans are good debts as they improve lifestyle. Leave these and focus on other debts like- home improvement debt, credit card debt, doorstep loans debt, overdrafts, etc.
Pay the one with the highest interest costs. Paying such high-cost debts improves your credit score, reduces debt burden, and reduces overall monthly payments.
4) Pay minimal payments on other debts
Check credit reports after sorting out the debts with high interest and balance. You may spot some debts lying there. It could be an overdraft, emergency loans for car or home repairs, pending insurance premium covers, etc.
Identify savings and calculate the total amount you need to pay these off. Sometimes saving lump sum with ongoing mortgage and student loan payments is challenging. Thus, try to pay the bare minimum on these liabilities.
Paying something is better than paying nothing. It is because regardless of how small a loan is, it shares interest costs. Neglecting such small debt would not help your credit score or financials either. If you aim for debt clearance, targeting small debts is also necessary. It will eventually reduce the overall liabilities that you share.
5) Pay debts that affect your credit score the most
Your credit score is an important factor in your financial journey. It measures the timeline by which you can achieve your lifestyle goals.
A credit score is a 3-digit number that credit agencies provide. They do so by analysing your money management skills. The experts undertake different parameters like- debts, income, employment history, past payment history, length of credit history, residential address, etc.
Individuals with careless money management, too many debts, and CCJs in the profile have low credit scores. It makes them unreliable in the lender’s view.
Thus, pay debts that affect your credit score the most. It could be no guarantor loans, small loans, credit cards, buy now pay later schemes, debt collection payments, etc. Paying such debts helps restore your credit score significantly. Alternatively, avoid closing old credit cards or bank accounts. It may impact the payment history and credit history length impacting the credit score.
6) Avoid borrowing credits to pay debts
It is one of the costliest mistakes individuals make when settling debt. You may be impatient in clearing the existing debts. However, taking another loan to clear one is not ideal. It does not help every time. Instead, taking up a new loan implies- budgeting for another liability.
Loans help fix an urgent need and achieve short and medium-term lifestyle needs. If you must, then a debt consolidation loan may help. It is only ideal if you have multiple debts (7 or more) and struggle with repayments. This loan allows you to merge every debt into a single payment. Eventually, it reduces the overall costs, interest payments and monthly repayment amount.
Alternatively, if short of a few euros to pay the final payment, get instant money loans in Ireland’s marketplace. You may get an instant sum to finance or bridge the payment. It is the best way to settle debt and achieve a debt-free lifestyle.
Avoid taking multiple or separate loans to settle debts individually. It is unhealthy for your credit and finances. Use it only if your current finances do not meet your repayment needs.
7) Track expenses, new debts and manage better
Congratulations on achieving a debt-free lifestyle. Once you clear the debts make new money management habits and schedules. Identify the best ways to improve income prospects. You may consider a hike, new job or part-time income. Next, analyse new life goals and the best ways to avoid debt. Prepare your finances before seeking a new loan. It will help you qualify for better rates.
Additionally, track small and big payments by preparing a monthly list. It helps you budget separately for each liability. Obstacles like- instinctual purchases, emergencies, and financial loss may impact payments. Prepare a backup plan for such circumstances with emergency funds and additional income sources.
Bottom line
These are some well-researched strategies to analyse or prioritise debt payments. Finding the debt to pay first is challenging. Thus, these tips will help you understand and plan payments hassle-free. Understand your finances, improve income and track debts to pay. It will help you budget realistically without impacting basic lifestyle requirements. The route to a debt-free lifestyle is at your disposal. Which debts would you prefer to pay first? Comment.
