Carrying debts through life can be incredibly stressful and financially crippling, especially for people trying to save for later life. For those with multiple forms of debt, knowing how to tackle them can seem difficult and overwhelming.
Understanding Your Debt Options
There are different schools of thought when it comes to paying off debts. Some suggest tackling those with higher interest rates first, while others recommend knocking them down from smallest to largest. There are three main options for people to consider, but these should all be taken into consideration alongside your own personal circumstances.
The Three Main Approaches
- Pay Priority Debts First – Focus on debts where failure to pay can lead to loss of home, utility disconnection, or legal action.
- Tackle the Most Expensive Debt – Also known as the avalanche method, this prioritizes debts with the highest interest rates.
- The Snowball Method – Pay off the smallest debts first for psychological wins.
Pay Priority Debts First
These are debts where failure to pay can result in the loss of your home, utility disconnection, or legal action. Always tackle these before clearing credit cards or loans:
- Mortgage or rent arrears
- Council tax
- Gas and electricity bills
- Court fines or child maintenance
Under this approach, you first make sure that essential obligations are covered. These are often called priority debts because failing to pay them can lead to serious outcomes such as losing your home, having utilities disconnected, facing legal action, or incurring significant penalties. Once priority debts are under control, you can focus on non-priority debts, such as credit cards, personal loans, overdrafts, and store cards. This is particularly useful when money is tight and you cannot afford to pay all your debts in full. It helps ensure that the most critical financial obligations are addressed first, reducing the risk of severe consequences while you work toward improving your overall financial situation.
Tackle the Most Expensive Debt (Avalanche Method)
Once your immediate housing and utility bills are secure, use the avalanche method:
- List all your remaining non-priority debts (e.g., credit cards, store cards, personal loans) ordered by their Annual Percentage Rate (APR).
- Focus all extra funds on the debt with the highest interest rate while paying the minimums on the rest.
- Once the highest-rate debt is cleared, roll that money into the next highest rate.
This mathematically saves you the most money over time. Essentially, once the highest-interest debt is eliminated, the amount you can pay toward the next debt increases – hence the name, it grows in momentum like an avalanche.
For example, you have credit card A at 20% interest, credit card B at 15% interest, and loan C at 8% interest. With the avalanche method, you would:
- Focus extra payments on card A (20%)
- Then move to card B (15%)
- Finally pay off loan C (8%)
Consider the Snowball Method
This is essentially the opposite of the previous strategy, but excellent for those needing motivation and a boost from psychological wins. You should focus on paying off the debt with the smallest overall balance first, rather than the highest interest rate. Once that smallest balance is gone, roll the payment you were making on it into the next smallest balance.
Steps:
- List debts from smallest balance to largest.
- Make minimum payments on all debts.
- Put any extra money toward the smallest debt.
- Once that debt is paid off, roll its payment into the next smallest debt.
The drawback of this method is it may cost more interest than prioritizing the highest-interest debt first (the avalanche method).
Expert Comment
Liz Hunter from MoneyExpert said: "Once your outgoings are clear, choose a strategy to clear your debts. You can pay off the smallest debts first, which is known as the snowball method, or target the highest interest rates first to get quick psychological wins. This is called the avalanche method and helps you save money in the long term. Both work, but picking one strategy and sticking to it is key to reducing financial anxiety. As you’ve already outlined your outgoings, you’ll be able to choose the best strategy for you and see how much you have left to pay off outstanding debts."
