Which Debt First? A Simple Order of Priorities

A plan beats a panic

When money is owed in several places, it's natural to pay whoever is shouting loudest. But the loudest creditor isn't always the most important one. Having a clear order of priorities takes a lot of the stress out of the situation and usually saves money too.

The order below is a widely used way of thinking about it. It isn't a rigid rule, and your circumstances may mean a different order makes sense, but it's a good place to start.

Step 1: Know your numbers

Before deciding what to pay, write down every debt you have. For each one note:

• Who it's owed to and how much is outstanding
• The interest rate (APR)
• The minimum monthly payment
• Whether any payments are already missed

Then work out your essential monthly spending. This tells you how much is genuinely available for repayments.

Step 2: Priority bills come first

Some debts have much more serious consequences if they're not paid, such as losing your home, having your energy supply affected, or even court action. These are often called priority debts, and they come first regardless of their interest rate:

• Rent or mortgage, and any loans secured on your home
• Council tax
• Gas and electricity
• Court fines and child maintenance
• Income tax, National Insurance or VAT owed to HMRC
• TV licence
• Hire purchase on something you need, like a car for work

Step 3: Keep up minimum payments on everything else

Once priority bills are covered, make at least the minimum payment on every other debt, such as credit cards, personal loans, overdrafts and buy now pay later. Missing payments usually adds fees and can damage your credit file, which makes things harder later on.

Step 4: Build a small starter safety net

It may seem odd to save while you owe money, but a small buffer, often around one month of essential spending or even just a few hundred pounds, stops the next unexpected bill from going straight back onto a credit card. It's what breaks the cycle.

Step 5: Don't miss free money from your employer

If you're employed and your employer offers to put more into your workplace pension when you do, it's usually worth contributing enough to get the full employer amount before overpaying debts. Employer contributions plus tax relief are effectively an instant return that very few debts can match. Opting out of a workplace pension to pay off debt means giving up that money.

Step 6: Clear expensive debt, highest rate first

With the basics in place, put any spare money towards your most expensive debt, which is the one with the highest interest rate. Pay the minimum on everything else and throw every extra pound at that one. When it's gone, move on to the next highest. This is sometimes called the "avalanche" method and it costs you the least in interest overall.

Some people prefer to clear the smallest balance first instead, sometimes called the "snowball" method, because the quick wins keep them motivated. It costs a little more, but if it keeps you going, that can be a fair trade.

A few things worth checking

• Overdrafts can be among the most expensive forms of borrowing, so check the rate on yours.
• 0% deals are only 0% for a set time. Note when the offer ends and what the rate becomes.
• Moving debt to a cheaper rate can help, but only if you don't run the old balance back up again, and fees are taken into account.

Step 7: Build your full emergency fund

Once the expensive debts are cleared, grow your starter fund into a full safety net, typically three to six months of essential spending, depending on your circumstances.

Step 8: Lower-cost debts and longer-term goals

Debts with low interest rates, such as many mortgages, don't usually need to be rushed. At this point you can weigh up overpaying them against other goals like saving more for retirement, investing, or saving for a home. There's no single right answer, and it depends on interest rates, your attitude to risk and what matters to you.

A note on student loans

UK student loans from the Student Loans Company work quite differently from other debt. Repayments depend on what you earn, not what you owe, and any balance is written off after a set period. For many people, overpaying is not a priority, but the right answer depends on your plan type and expected earnings.