Prioritising payments when you are in debt
Debt becomes a real issue when you don’t have enough money to cover your regular repayments on loans, bills and credit cards. When repayments get out of hand, people often turn to payday lenders, credit cards and getting into more debt in order to pay off the debt they have. This can lead to a vicious debt cycle which is near impossible to break. You can avoid this debt cycle by prioritizing your debt repayments as they become an issue.
Know your debts
If you are starting to struggle with your debt repayments, you need to take some time to plan out a strategy to get your budget back on track. The quickest and easiest way to get started is to write all your debts down. You’ll need to know how often the debt is due including the next payment date for each, how much the minimum repayment is, how much you have left owing and who you owe the money to.
Once you have gathered this information, you’ll have a really good idea of where you are at with your debt. It will also help you figure out which debts take priority when you come up with your repayment plan.
Speak to your creditors – request hardship
Understandably, when people fall behind on their debts, they shut down and go into hiding, ignoring all the calls from their creditors. But your creditors can be your lifeline in this difficult time. By being honest and up front with your creditors, they may be able to offer a helping hand rather than harass you for payment. Many companies will extend your due date, help to organise a reduced repayment arrangement or even freeze the interest for a period of time. To discuss these options with your creditors you need to call the hardship department – your bill will often display a specific number you can call if you are having trouble making your repayments.
If you are able to arrange hardship, add the new information to your list of debts including how long the hardship arrangement will last for so you can plan accordingly.
Find a method in the madness
Now you have an idea of your debts, you need to construct a plan to pay them off. Some debts are more important to repay than others and therefore should be prioritised. Make sure you are managing at least the minimum repayments on all your debts so you aren’t defaulting any of the debts. With any extra money, you can create a plan to pay off your debts early.
Secured debts – things like your mortgage and secured car repayments should take priority over all your debts. If you fail to make the repayments on these debts, your creditors are within their rights to repossess the assets the loan has been secured against. So by missing your secured payments, you are putting yourself at risk of losing your house or car. Make sure you are always making the minimum payment on these debts.
If you can’t afford the repayments on your car and you don’t need it for work or if you have another way of getting around, you might consider handing it back to your creditors voluntarily. Your creditors will then sell the car to try to recover as much money as possible. If there is a shortfall, you will still owe them money, but this debt will be unsecured.
Debts in hardship – These arrangements might not be in place for very long and they are designed to help you catch up on your repayments quickly. Try not to default on these and risk having them revoked by prioritising the payments.
Debts with High Interest – These debts are costing you the most to maintain. The loan amount might only be small, but the massive interest rate accumulating will send your repayments through the roof. Where you can, prioritise these debts by allocating a little extra money to the repayment amount to try to pay it off early.
Generally, the debts with the highest interest will be either a credit card or a payday loan. Make sure you don’t continue to use the credit card while you are trying to pay it off. You might also consider a balance transfer to a card with 0% interest period to help pay this debt off without accumulating further interest.
The smallest debts – If you have a few debts of $200-$300 that you just can’t get rid of, pay them off first. Not only will you not have to worry about these anymore, you can then allocate the money you would usually put towards them to your larger debts to help you get the balance down.
Do what’s right for you
It is entirely up to you how you prioritise your debts. Everyone is in a different debt situation and what works for one person, might not work for another. Each time you pay off a debt, you might like to contribute what you would usually pay to that debt to another to help you pay that debt off faster. You might also like to put the money back into your cashflow to help you pay for essentials like petrol and groceries. You might even want to try to save it.
The important thing is to always know your debt situation – what you owe to who, so you can keep track of repayments and take affirmative action if you know you are going to fall behind.