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Prioritising your debt repayments

Financial Wellness

Financial Wellness - Fidelity

Few of us are lucky enough, or rather cash-rich enough, to be debt-free for our entire lives. In a recent survey Fidelity found that 79% of respondents in the United Kingdom had some form of debt1 Sometimes debt is essential, think about the mortgage on your home or the loan on your car. And in some cases, debt can be positive - enabling you to manage your cash flow better by making purchases on a credit card and paying it off later.

While debts may get a bad rap, not all debts are equal. Even so, paying off debts is a priority for many and found to be in the top two tasks listed on people’s financial to do list2. Knowing which you should prioritise is essential if you want to keep your financial integrity and your credit rating in good shape.

Here’s what you need to know when it comes to prioritising paying what you owe.

1. Priority Debt

Certain debts carry heavier sanctions, so you should make these your priority. Top of the list should be council tax. Fail to pay and you could find the money you owe being deducted from your salary, have enforcement officers knocking on your door to remove items you own, or in extreme cases, even end up with a prison sentence for non-payment of council tax.

2. Secured debt

Secured debt is money that is secured against collateral - so things like your home or your car. This means that if you stop your repayments, you face losing the goods themselves. This is why they are priorities when it comes to keeping up with repayments.

In the case of a mortgage, a bank can force you to sell your house. In the case of a car loan, the lender can take your car.

3. Unsecured Debt

Unsecured debts are riskier for lenders, as they have no certain way of getting their money back. That is why you’ll pay a higher interest rate for the privilege of borrowing money.

Credit cards are a common form of unsecured debt3. For many people credit card debt isn't a problem, and 50% always pay off the full balance at the end of each month. But fail to do so and you will typically pay up to 20% a year on the money you borrow.

Payday loans are less of an issue than they once were, as the repayments are now capped.

4. Student Debt

Stories abound of students graduating with significant debts. Tuition fees and the cost of living vary across the UK but as an example, English universities can charge home students up to £9,2504 per year for an undergraduate degree. A typical three-year degree course could therefore cost around £27,750.

But the world of student loans is very different to any other type of loan. A student loan is a very low priority debt. Those who take a student loan will start to pay it back once they begin earning over the threshold amount. For example, students who started an undergraduate course anywhere in the UK on or after 1 September 2012 will start to pay back at a fixed rate of 9% of any earnings above £26,575 a year (the threshold amount)5. Repayments continue until they have repaid the loan (and accrued interest) or until 30 years has passed - whichever comes sooner.

Next steps 

See how much extra monthly income you have to pay off debt with our managing your debt activity sheet

If you’re struggling with debt repayments, it’s important to speak up and get help. You can get free and impartial advice from the government’s MoneyHelper service.

Sources:

Fidelity Global Financial Wellness Survey, 2020
Fidelity Global Financial Wellness Survey, 2020
Fidelity Global Financial Wellness Survey, 2020
www.ucas.com/finance/undergraduate-tuition-fees-and-student-loans
www.gov.uk/repaying-your-student-loan

Important Information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision, nor should it be treated as a recommendation for any investment or action. You should regularly review your investment objectives and choices and if you are unsure whether an investment is suitable for you, you should contact an authorised financial adviser.