Getting by without a single amount of debt to your name seems quite impossible these days. Although there is a difference between good debt and bad debt, when your debt gets out of hand, you need an action plan to keep you and your finances from sinking. Prioritising your debt is one of the first things you should do when it feels like you are drowning in a sea of debt. This article will guide you through three easy steps on how you can prioritise your debt.
Step 1: Write it down
Make a list of all your existing debt and write it down on a piece of paper. This paper will be important moving forward so keep it in a safe place. Being organised during the entire process could go a long way so you might want to consider using a file where you can keep all your debt-related documents. You can also create a document on a computer should you prefer it. This will allow you to make changes as you work towards becoming debt-free.
Step 2: Know your debt
After writing down all your debt as explained in step one, you need to dig deeper into your finances. Before you can prioritise your existing debt, you need to exam your finances thoroughly. Work through your list of debt and gather as much information as possible regarding the debts you listed in step one. Get in touch with your credit providers and request the most recent statements of all the debt you have listed in step one. Get as much information as possible regarding all of your debt. Look into information like:
- Amount outstanding with each credit provider
- Monthly repayment amounts with each credit provider
- Interest rates charged by each credit provider
- Remaining monthly repayments with each credit provider
- Debit order date of each monthly repayment with each credit provider
You can add this information to your existing list. It is important to be accurate and very specific when putting this list together.
Step 3: Prioritise your debt
Once you have successfully completed step one and two, you can start prioritising your debt. There isn’t a wrong way to prioritise your debt – simply making the decision to prioritise your debt already puts you one step in the right direction. How you prioritise your debt is up to you. It is in your best interest to make all your monthly repayments as far as possible. Use the two scenarios below to guide you through the prioritisation of your existing debt.
If you feel like your finances are under control and that you want to prioritise your debt simply because you want to live debt-free eventually, you should look into paying off your debt with the highest interest rates first. High interest bearing debts should, therefore, be your first priority. Check with your credit providers whether a penalty fee will be charged for paying off your debt early.
If you are under financial pressure and you don’t know who to pay first, you should prioritise your debt according to you and your household’s needs. Your home loan or rent should take first priority if you want to keep a roof over your head. If you still owe money on your car and you rely heavily on it to get to work and back, this can be another example of a high priority debt. Credit providers prefer it if you make necessary payment arrangements instead of simply skipping payments or stop paying altogether. Contact your credit providers and see if you can find a solution that best suits your budget. You can also prioritise your remaining debts (like retails accounts, credit cards and personal loans) according to the interest rate.
Once you have prioritised your debt, you need to draw up a plan in order to take action against your debt.