Debt: Resolution time! Grab a pair of scissors and start to sort out your finances


Debt: Resolution time! Grab a pair of scissors and start to sort out your financesFor many people the New Year is the perfect time to make resolutions.

The same old favourites such as losing weight, drinking less, taking more exercise come around each year; but it’s just as important to keep your finances healthy as it is your body.

After an expensive Christmas, paying debt off is the first place to start for many people who want to get their finances in shape.

But which debt should you pay off first and why? Read on and we reveal everything you need to know.

Prioritise your debt

Debt comes in all shapes and sizes, secured, unsecured, with a fixed term or open ended.

The first job though is to prioritise all of your debt to work out which you should pay off first.

Make a list showing the amount you owe, your current repayments and the interest rate you are paying. If you have debts on credit or store cards the interest rate will be shown on your statement. For personal loans and mortgages it will be on the original agreement and it is shown on your bank statement in the case of overdrafts.

Now list the debt in order of interest rate, the highest at the top and the lowest at the bottom.

What next?

Unless you are in financial difficulty (more of which on a moment) you will be making monthly repayments on all of your debt.

A mortgage is usually a long term commitment, often 25 or 30 years and generally has the lowest interest rate.

Personal loans and hire purchase agreements, such as those used to help buy a car, generally last for a shorter period, say between three and five years.

When it comes to credit and store cards, with interest rates often in double figures, if you are just making the minimum payment it will take many years to repay.

This is where you should start your resolution to get your finances in shape.

Look for better deals

Firstly, take a pair of scissors and cut up your credit and store cards; you don’t want to make the problem any worse!

Next you should search the market, using one of the many comparison websites available, to try and find a better interest rate on your credit or store card.

This is known as a ‘balance transfer’ and could help to cut your interest rate, meaning you pay more of the debt off each month.

Be careful though, many of the most eye catching deals will charge a fee to transfer your balance and you should carefully compare different options to make sure you make the right decision.

Once you have secured the best possible deal, now is the time to start paying as much as you can off each month. However, if you have other debt perhaps a higher purchase agreement or personal loan, with a higher rate of interest than your credit card start here instead.

In a nutshell, once you have got your debt onto the lowest possible rate of interest start by paying as much as you can off each month the debt with the highest rate of interest. You could also consider using any savings you have to repay a lump sum from your debt, especially if the interest rate you are receiving is lower than you are paying.

Once that debt has gone move on to the next and so on.

A word about mortgages

The mortgage on your home generally has the lowest interest rate. This means you should think about repaying your other debt before you start overpaying on your mortgage.

However, you should still make sure you are paying the most competitive rate possible.

Find out the interest rate you are paying and then compare that to other mortgage products currently available. It is also worth contacting your existing lender to see if they will offer to cut the rate of interest you are paying in return for keeping your business.

Be careful though to factor in the costs of moving mortgage product, which can add up and eat into any savings you make.

A reminder of the order you should repay your debts

It’s worth recapping on what we’ve said so far.

Start my making sure you debt is arranged on the lowest interest rate possible. Now over pay on the debt with the highest interest rate, usually a credit or store card; unless the deal you have secured means the interest rate on your personal loans is higher.

Once you have fully repaid one debt move on to the next.

Struggling to make repayments?

Paying more each month to be debt free is not an option for everyone.

Despite the economic recovery many people are still struggling with the burden of debt and find it hard to make even the minimum payments each month.

If you are one of these people you should seek help immediately; doing nothing could put your family finances, and even your home, at serious risk.

We would suggest you steer clear of seeking help from the firms who advertise regularly on day time TV and call Step Change, a charity set up specifically to help those people in financial difficulty.

You can call them on 0800 138 1111 or visit their website by clicking here.

The all-important small print

Your home is at risk if you do not keep up the repayments on a loan secured on it.