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Which debts should you pay off first?

If you're juggling several different debts the best thing you can do is to tackle them head-on and get on track to becoming debt-free. But where do you start? We look at whether you should pay off a mortgage, credit card or an overdraft first and what you need to keep in mind.

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If you owe money to several different companies you're certainly not alone — most people have at least some form of debt, whether that's on credit and store cards or in the form of a mortgage, a loan, or an overdraft.

Some debts can be cleared relatively quickly while others will have to be spread over several years. So, which one should you focus your efforts on first?

Paying off debt: where to start

The order of priority when it comes to paying off debts will depend on the type of debts that you have and whether they are secured or unsecured.

 Debts secured on your home, such as a mortgage, may result in your home being repossessed if you miss a repayment, so it is important to know the terms and conditions of any debt you have.

 Other debts - notably council tax - can result in you being put in prison. These should also be high up on your list of priorities.

Should I start with my mortgage first?

If you have a mortgage, your mortgage should be one of your highest priority debts because your home may be put at risk if you don't keep up with repayments.

In contrast, if you fail to keep up repayments on a store card the consequences will still be serious but are less likely to result in you losing your home.

As such any debts you have that are secured on your home (which could be a loan as well as your mortgage) should be given priority over unsecured debts.

This doesn't mean that you should focus only on paying off your mortgage while keeping other debts on the backburner.

You will still need to keep up repayments on all debts, but if you're struggling with this, make sure you at least have enough funds to clear your high-priority debts then get help with managing the rest.

Which debts should I prioritise next?

It's often more cost effective to focus on clearing your most expensive debt first, simply for the reason that your most expensive debt is costing you the most money.

By getting rid of it, you'll have more money freed up to put towards paying off your other less expensive debts until you are debt-free.

You will need to sit down and draw up a list of any outstanding debts you have - credit cards, loans, overdrafts, etc. If you don't know the rate of interest charged to each of your debts check statements or contact your lender to find out.

When you've figured out which debt has the highest APR it's a good idea to put as much spare cash as you can into reducing and finally clearing the balance, making overpayments if it's possible to do this without penalty.

Remember that you will have to keep making payments on all your other debts, but it's worth focusing your spare cash on the most expensive one until it's cleared, then putting your freed up cash towards clearing the next expensive debt and so on until you are debt-free.

Can I reduce the cost of any debt?

It is possible to move expensive debt to a cheaper home and this is always worth looking at.

There are several options, however, the options available will depend on your credit rating.

Depending on your circumstances, your options can include transferring high-interest credit cards, store cards and even overdraft debts onto a credit card that offers a lengthy interest-free balance transfer.

This can help you to significantly reduce the amount of interest you're paying on your borrowing, giving you more free cash to put towards clearing the debt itself.

You might also consider moving to a current account with a more competitive overdraft interest rate.

Consolidating your debts is another option but this is rarely as straightforward or cost effective as it can first seem.

What to look out for when paying off debt

There is a lot to think about when deciding which debt to pay off first. As well as considering how expensive a debt is – that is, the rate of interest you are paying on it – you should also consider the size of your debt.

Some debts may be large with small interest rates, while others can be small with high rates of interest. You might want to pay off some of your smaller debts straight away just to tick them off the list.

For example, if you have debt on a store card to the amount of, say, £150, it's a good idea to simply pay this off in full, stop using the card and cancel the account. Store card interest rates can be notoriously high, often in the region of 30%, so they're not worth using unless you can pay the balance off in full every month.

By clearing a couple of these smaller debts quickly you can cross those off your list and concentrate on hitting your most costly debts with freed-up cash, while at the same time keeping up minimum repayments on the rest of your debts and keeping in mind those that are highest-priority.

Larger debts aren't always the ones to try and clear first. For example, your mortgage, though high priority as it is a debt secured on your home, is still a long-term debt and so can and should be spread over several years.

Should I pay off my student loan early?

In almost all cases it’s a bad idea to overpay on your student loan.

That’s because the amount you are charged isn’t based on the size of the loan, but on what you earn.

Additionally, student loans aren’t recorded on your credit report and missing payments won’t be penalised.

To add to all that, after a set period your balance is wiped clean no matter how much you owe.

That means the only time it’s worth paying extra to clear your student loan is if you’re earning enough to pay it off before it’s wiped clean. You can read our full guide to paying off your student loan early to see if that applies to you.

What else should I consider?

If you have several debts to pay off it may be better to hold off saving until those debts are cleared.

Though putting a bit aside for a rainy day is always a good idea, any money you have in savings will likely be earning interest at a lower rate than that which is being added to your outstanding debts.

As such, it can often be more cost-effective to put any spare cash you have towards clearing your debts rather than building up a nest egg - especially with flexible debts like credit cards and overdraft facilities.

It is really important to discipline yourself not to borrow any more money once you have started clearing your debts, or all your hard work will be lost.

Also remember that while it's a good idea to identify which of your debts should be at the top of the paying-off queue and focus on them, don't forget your other debts - you'll still need to keep up minimum repayments on them too, at the very least.

There is no 'one size fits all' answer to whether to pay off credit cards or overdrafts first — it all comes down to your circumstances and what sort of debts you have.

If you're struggling with meeting repayments, high-priority debts such as your mortgage should be focused on first and foremost. Otherwise, it's up to you to decide whether to pay off the most expensive or the smallest debt first depending on which strategy you think will work for you.

Just remember that whichever strategy you adopt, you can still make sure you're getting the best deal possible on your debts by transferring and switching if necessary, so that ultimately, you're not paying a penny more than you have to for your borrowing.

Where to get free debt help

If you are struggling to work out the priority from the non-priority debts, or need help contacting your creditors, contact your nearest Citizens Advice Bureau, who will be able to point you in the direction of free, impartial and confidential financial advice.

Find out more details about where to access free debt help and support here.