One of the first steps you should take when coming up with a plan for repaying your debt is to establish an order for paying back what you owe. To repay your debts most effectively you have to identify which are the most important and concentrate on paying these off first.

Identifying which are your priority debts and which are your non-priority debts is a key part of becoming debt-free. But what are priority debts? What are non-priority debts? And how do you work out which is which?

Financial management is key to maintaining good financial health. To manage your finances, you need to understand what are high priority debts and what are low priority debts. Learn which debts are low priority.

• What are High Priority debts?
• What are Low Priority debts?
• How to Know Which Debt is High or Low Priority
• How to Prioritise your Debts
• What’s the Best Way to Pay Off Credit Cards, Student Loans and Medical Debt?

What are High Priority debts?

Priority debts are those debts that you should pay first. They aren’t necessarily the largest debts or the debts with the highest interest rate. However, if you do not pay a priority debt there will generally be some serious consequences.

Read Also: Calculating your Debt to Income Ratio

Usually the most important debts are those secured by property that you want to keep, such as your house or car. However, failure to pay other priority debts might leave you bankrupt, without heating or electricity or in court. That is why it is vital that you pay your priority debts before all others.

Priority debts include:

Your mortgage, secured loans or rent. Payments for a place to live are obviously essential. Many people get into serious debt problems and find themselves with nowhere to live because they fail to keep up their monthly or weekly rent, mortgage or secured loan payments. Unless you know you are going to move and have a new place to live, paying your rent or mortgage is likely to be your top priority. This includes payments to any secured debt consolidation loans because non-payment of these could also result in the loss of your property.

Income tax, National Insurance and VAT. It is important that you pay any tax that you owe. Not paying tax could lead to you being made bankrupt. In addition, while a tax debt alone is not a sufficient reason for a prison term, cases of serious fraud could result in criminal proceedings.

Child maintenance. Not paying child maintenance via the Child Support Agency (CSA) or under a court order could lead to a court appearance unless you can convince the authorities that you really could not pay. If your income has dropped sharply, you may be eligible for a reduction of your child maintenance obligation.

Council Tax and utility bills. Being without gas, electricity, heating, water or a telephone is dangerous and can leave you with no lighting or heating. Payments to your utility providers should be near the top of your priority list. Again, speak to the utility companies about alternative payment plans. In addition, speak to your local council if you will have trouble paying your Council Tax. They may be able to reduce what you have to pay. For example, you might qualify for Council Tax Benefit ora discount you didn’t know about.

Car finance payments. If you need your car to keep your job, try and keep up the payments. If you do not need it, consider selling it to avoid repossession which will almost always occur if you fall behind on the repayments.

Other secured loans. Secured debts are linked to specific items of property. For example, money owed on your house and car are secured debts. Debts on furniture, boats, caravans and expensive electronic equipment may also be secured. If you do not repay the debt, the creditor can take the property. So, if the property is something you cannot live without and you think the creditor will take it, you will need to keep up to date with the payments. Alternatively, you can try and work out a payment with the creditor involved.

What are Low Priority debts?

A non-priority debt is one with no immediate or significant adverse consequences if you fail to pay. Paying these debts is a desirable goal, but not one of your main priorities.

You may not lose your home or go to prison for not paying ‘non-priority’ debts. However, you can still be taken to county court and ordered to pay what you owe. And, if you still don’t pay, there are a range of county court enforcement options your creditors can try to take against you.

Non- priority debts include:

Credit and charge cards. If you do not pay your credit card bill, the worst that will happen before the creditor takes you to court is that you will lose your credit privileges. If you need a credit card, keep and make the minimum repayments on one card and put that card on your priority debts list.

Loans from friends or relatives. You may feel that you have a moral obligation to pay loans to people you know well. However, these creditors – who psychologically seem the least like creditors of anyone – should generally be the most understanding with you and the most likely to negotiate your repayment terms.

Store cards. As with credit and charge cards, if you fail to pay these bills you will probably lose your credit privileges and, if the debt is large enough, you may be taken to court.

Unsecured or payday loans. Unsecured and payday loans are not tied to any item of property. So, the creditor cannot take your property if you refuse to pay without taking out a ‘charging order’. If you refuse to pay, the creditor can collect from you only by obtaining a court judgement. These unsecured debts are rarely, if ever, a priority to pay first. Bear in mind, however, that a court judgement turns an otherwise non-priority, unsecured debt into a priority one. Creditors can collect on a court judgement by taking your property.

Overdrafts. Overdrafts are unsecured borrowing and therefore will rarely be a priority debt. Speak to your bank who may agree an arrangement for you.

How to Know Which Debt is High or Low Priority

Some debts may be right on the line between priority and non-priority. Not paying the debt won’t cause severe consequences in your personal life, but it could prove painful nonetheless. In deciding whether or not to pay these debts, you should consider the relationship you have with the creditor and whether the creditor has already begun efforts to collect the debt you have with them.

Some debts which can appear in the grey area between priority and non-priority are:

Car insurance. It is against the law to drive without insurance. So, you might consider this a priority debt if your car is essential to you.

Things your children may need. Paying for a maths or English tutor for your child may not seem like a priority. However, if the alternative is that your child fails their exams or fails to get a university place, you might well want to keep paying for the tuition.

Payments for a car that is not essential for your job. The extreme inconvenience of not having a car (for example if you live in a rural area) may justify making these payments.

Court judgments. Once a creditor has a court judgement they can collect it by taking some of your property. If a particular creditor is about to employ a bailiff to collect property to pay a debt the fact that the original debt may have been a non-priority one is irrelevant. Making payments to this creditor in an exchange for keeping your belongings may be essential otherwise the bailiffs might take steps to take them.

How to Prioritise your Debts

Paying off debt can be a long journey depending on how much of it you have. It’s extremely easy to lose motivation and give up, especially when you have other financial goals competing for your limited resources. That’s why it’s so important to create a plan to pay it off. 

However, even that can seem overwhelming when you have six different accounts you’re trying to pay off. Thankfully, there are a few rules of thumb that can help you prioritize your debt repayment.

Organizing Your Debt

First things first, you’ll need to find the following information on all of your debt:

• The amount owed (balance)
• Minimum payment
• Interest rate/annual percentage rate (APR)
• Payment due date

This information can typically be found on the statements you receive in the mail or online, as long as you have an account to access them. 

If you can’t find this information easily, then simply call your debtor and ask them for the information. They should be able to look it up for you. 

The two biggest pieces of information we’ll be focusing on involve your balance and interest rates, so at least make sure to get those two before proceeding. Having a budget in place might also make this easier.

Prioritize Your Debt By Interest Rate

This is known as the “debt avalanche” method, and mathematically, it’s the one that will save you the most money over the course of your debt repayment journey. What you need to do is order your debts from highest interest rate to lowest interest rate.

For example, say you have a $10,000 loan with an interest rate of 7%, and you have 5 years to pay it off. Your minimum monthly payment would be $198, but not all of that payment will go toward paying the balance off.

Instead, around $58 of your first payment will go toward interest instead. Ouch. Contrast that with your last payment, in which only $1 goes toward interest. 

Making extra payments means ripping through interest faster so more of your payments can go toward the principal. However, this method fails to focus on the psychological impact debt often has.

Prioritize Your Debt By Balance

What if you order your debt from highest interest rate to lowest and find that your highest interest rate debt is also the one you owe the most on? That might seem discouraging, and you haven’t even started to plan yet.

If this turns out to be the case, and you’re looking at a mountain you don’t think you can reach yet—and aren’t excited to reach—then you might be better off with the debt snowball method. Instead of interest rate, you focus on paying off the debt with the lowest balance first and then work your way up. 

No, you’re not going to save as much money this way, but getting out of debt is often an emotional experience, not a logical experience. You should choose whichever method makes you the most motivated to kick your debt to the curb. If getting a small win every so often is more appealing, then the snowball method is the way to go.

Let’s take a closer look at how these debt repayment methods work as there’s more to them than meets the eye.

Snowballing Your Payments for Momentum

Right now, you might be making the minimum payments on your debt, but that’s not going to allow you to reach debt freedom very fast. If your goal is to become debt-free so you can start living life without shackles, then you want to start paying extra on your debt. That’s exactly how the snowball method works. Say you have 4 debts: 

• Credit Card #1: $5,000 at 12% interest
• Credit Card #2: $1,000 at 15% interest
• Student Loan: $14,000 at 4% interest
• Personal Loan: $10,000 at 7% interest

With the debt snowball method, you would focus on credit card #2 first. For the sake of example, let’s say your minimum payment is $20. You decide to pay $100 toward it while continuing to pay the minimums on all your other debts. 

So you’re paying a total of $120 toward credit card #2. Once you’ve paid it off, you move on to credit card #1. Let’s say the minimum payment for that was $60. You roll the $120 you were paying on credit card #1 over, for a total of $180.

After that’s paid off, you focus on your personal loan, which had a minimum payment of $198. With the $180 you were using to pay off credit card #1, you can pay $378 toward it. 

Once you’ve paid the personal loan off, it’s time to kill your final debt: your student loan. The minimum payment on this was $260 but coupled with $378, you’re paying $638 toward it. 

With this example, it should be easy to see how you’re “snowballing” your payments together and making a bigger impact each time you pay off a debt. If you didn’t use this method and kept paying the minimums across the board, it would take you much longer to pay off your debt. 

You’re just using the resources you have in a better way. Paying $100 instead of $20 on credit card #2 isn’t even necessary—you could pay just the $20 and snowball that—but it does help get you in the mindset of paying extra on your debt. 

You can use this same principle for the avalanche method, but the order in which you pay off your debts would be different.

The Debt Snowflake Method

Yet another option you have is to use the debt snowflake method, and this method can be used in conjunction with either the debt snowball or debt avalanche methods. As you might guess from the name, “snowflaking” payments just means making little payments whenever possible.

Let’s say you find $5 at the gym, or your coworker gives you $10 for the meal you bought them months ago (that you forgot about), or you receive $50 from a relative for your birthday. In all of these instances, you received small windfalls of money—this is money you weren’t expecting and hadn’t accounted for in your budget.

Since it’s “found” money or “extra” money, it goes straight to your debt. You could have lived without it, so why not put it toward your #1 goal of getting out of debt?

Neither method is right or wrong. As with many things in personal finance, it’s completely up to you which method you choose. 

What’s important is that you’re paying off debt and making progress on that end. Paying off debt gets you closer to your other financial goals, and your money finally becomes your own. You’ll have the peace of mind that you no longer owe anyone. 

You also don’t necessarily need to choose between the two methods. You could try the snowball method, and if you find it’s not motivating, switch to the avalanche method. Your plan doesn’t need to be set in stone. The more important thing is that you’re focused on paying off your debt. 

What’s the Best Way to Pay Off Credit Cards, Student Loans and Medical Debt?

The average American household now carries more than $134,000 in debt (including mortgages). Let that sink in for a second. That’s 2.4 times the median household income of $55,322. In other words, many of us are drowning in debt.

That kind of burden takes up a lot of headspace, whether you’re thinking about making each monthly payment on time or avoiding creditors if you can’t afford to. All that focus on debt also limits our ability to save for the future and meet other financial goals.

It also, perhaps obviously, increases stress and anxiety. One study found that people who struggle with debt are more than twice as likely to suffer from depression; another report links debt to higher death rates. So getting out of debt isn’t just a positive financial move—it’s good for your health, too.

What’s the best way to pay off debt? Follow this step-by-step guide to devise a plan to successfully pay off any kind of debt you might have. Then dig deeper with tips on how to specifically pay down credit card debt, student loans and outstanding medical bills faster.

Step 1: Get in the right mindset to pay off debt.

The first step in accomplishing any big goal is to get into the right mindset. This might require rethinking some of the assumptions that have either gotten you into debt or are keeping you there—from not believing it’s possible to be debt-free one day to thinking you earn too little or that you’ll have to make painful sacrifices in order to make it happen.

To stay on track, it can help to regularly remind yourself:

1. Debt is the biggest barrier to building wealth.
2. Trying to keep up with the Joneses will actually keep you back. You may be envious of their spending habits now, but they’ll likely envy you when you’re debt-free.
3. Paying off debt is possible and within reach.

Step 2 Organize your debts and pinpoint what’s most urgent

A little organization goes a long way when you’re figuring out which credit card, loan or overdue bill to pay off first. Make a list of everything you owe, noting the balance, minimum payment, due date and interest rate. You should be able to find this information on your statement (and online).

Once you review it all in black and white, it’s easier to understand which debts are most urgent. If you’re in a position that requires you to choose which bills to pay this month, focus on the essentials—like staying current on your rent or mortgage and utility bills to keep a roof over your head and the lights on. If you have a car payment and need that car to go to work, that should be next on your list.

Assuming you can cover your bills and are focusing on becoming debt-free, the next step is deciding how to prioritize the debt you’ve laid out.

Step 3 Research the ‘avalanche method’ and ‘snowball method’ of paying off debt.

Two common approaches to paying off debt are prioritizing by interest rate—known as the debt avalanche method—or according to balance, known as the debt snowball method.

Avalanche method: This strategy focuses on eliminating high-interest debt first. List your debts in order from highest interest rate to lowest interest rate, and start at the top—devoting as much cash as possible to the first loan, while making minimum payments on the others. Once you wipe it out, move to the one with the second-highest rate.

Snowball method: In this case, you prioritize debt according to the balance owed, regardless of interest rate. List your debts in order from smallest balance to largest, and start at the top. Once you’ve paid off the smallest loan—while making minimum payments on the rest—move on to the second-smallest balance.

Step 4 Select the debt payment method that works best for you.

Both the avalanche method and snowball method work well for paying off debt, but offer different advantages.

With the avalanche method, you end up saving more money over time. Here’s why: When you pay off a debt slowly with minimum payments, much of your monthly payment is applied to interest in the beginning; the percentage of interest included in your payment decreases as you get closer to a zero balance.

When you pay more than the required minimum amount, you’re able to cut through the interest faster. With the avalanche method, you’re putting more toward the balance of your highest interest debt first, so you’ll pay less in interest over time.

While the avalanche method may be the most cost-effective strategy, it may not help with the mental effort required to get out of debt since your highest interest debt may also be your largest.

Because the snowball method focuses on paying off small debts first instead, it allows you to experience small successes along the way. Fully paying off small balances can give you the psychological boost to keep pushing forward.

Selecting a method depends on your personality and preferences—and you’re not married to your first decision. If you try the avalanche method and find that you’re losing motivation, switch to the snowball method to see if it’s a better fit.

You’ll be surprised at how far these little payments can take you on your debt journey. Small, incremental payments can ultimately yield big successes.

3 Tips for Paying Off Medical Debt

Almost 30 percent of Americans have trouble paying medical bills, according to the Kaiser Family Foundation, and medical debt is the top reason Americans file for bankruptcy. While medical bills are often unavoidable, paying them off is crucial for getting out of debt and achieving financial stability. Consider these strategies for tackling medical debt faster.

Scrutinize your bills. Health care providers (like doctor’s offices, hospitals and other facilities) are notorious for making billing mistakes, so study your bills to ensure accuracy. Finding one could mean you actually owe less than you thought.

Common errors include unnecessary procedures and supplies, coding mistakes and insurance errors. Providers also sometimes bill you inadvertently for co-pays when you’ve already paid in the office; so if you’re not sure, call and check.

Negotiate. Medical providers and facilities are typically willing to negotiate with patients because they’d rather get something than send the debt to collections. Try calling and talking about your bill and your ability to pay—and simply make an offer. For instance, you might offer to pay $1,500 to cancel out a $3,000 bill immediately. Be sure to get any agreement you make in writing.

Set up a payment plan. Even if your medical provider isn’t willing to wipe away part of your bill, they’ll likely work with you to set up a payment plan. If you have an agreement for a payment plan that you can stick to, you can pay the bill faster and hopefully avoid collections.

4 Strategies for Paying Off Credit Card Debt Faster

Collectively, Americans have more than $1 trillion in credit card debt, with an average balance of more than $6,000 per adult, according to Experian.

With notoriously high-interest rates (as of late August 2018, the average is 16.91 percent) and low minimum required payments (typically 2 or 3 percent of the balance if you owe more than $1,000), credit card debt is particularly damaging to your financial health. But the faster you can pay it off, the less you’ll pay in interest.

Consider these ideas for paying off credit card debt faster:

Take willpower out of the equation. It’s difficult to make progress on paying off credit card debt if you’re still charging new purchases. If you need a little help with impulse control, take your card out of your wallet so you won’t be tempted to use it on the go. And set up automatic payments to ensure you’re contributing what you intended to (at least!). You can always make extra payments online, too.

Make room in your budget. Stock up on cheap (and healthy) foods that last awhile, buy basics in bulk, pay less for utilities, use free apps and coupons, meet friends for happy hour and eat off the bar menu (which is typically cheaper), shop secondhand—basically, start with low-effort ways to cut back without feeling deprived. And look for ways to earn more, whether that’s by asking for a well-deserved raise at work or picking up a side gig. Funnel all your savings to debt.

Look for a balance-transfer deal. Credit card companies frequently offer promotional deals to transfer your balance to another card with a lower interest rate—or even 0-percent interest—for a set period of time. This can help you make faster progress because you won’t be accruing interest charges while you submit payments.

4 Ways to Pay Off Student Loan Debt Faster

More than 40 million Americans have student loan debt, with nearly 6 million owing more than $50,000, according to one Brookings Institution study. Those stats may be discouraging, but even a five-figure balance doesn’t mean you’re doomed to stay in debt forever. These are several ways to pay off student loans faster—and smarter.

Pay off private loans first. Private student loans often have higher interest rates and less flexible repayment terms than federal loans. If you have both, you’ll likely want to focus on these first. They may also have variable interest rates, so your rate could rise over time.

Read Also: 20 Brilliant Ideas to pay off Debt Fast in 2021

Consider refinancing. By refinancing multiple loans at once, you can get one consolidated monthly payment with a lower rate, which streamlines the debt payoff process. Even if you just have one loan, you may still be able to refinance it, so more of your payment goes toward the principal.

Look into forgiveness options. There are a number of loan forgiveness programs available these days. For example, nonprofit and government employees may qualify for Public Service Loan Forgiveness, and teachers willing to serve in a low-income school or educational service agency can look into the federal teacher loan forgiveness program.

One catch: These programs often have strict requirements, so make sure to do your homework before counting on forgiveness.