Before you start paying your dues, there are some considerations that you should make. Some arrears are given more consideration than others for payment. Also, you should consider what you have to settle deal with debt collectors, what you need, and what you are anticipating to have or get. Once you have figured all your debts, you should consider the following:
- Paying debts with colossal interest rates
Arrears with colossal interest rates accumulate very fast. If you have such dues for a long time, they sum up to huge figures. They may go beyond your ability to repay. It is usually economical to pay such arrears first.
- Liabilities with the consequences of default
Some debts, if not paid as agreed, will land you in massive trouble. Such arrears always have a fixed timeline and failure to comply leads to very harsh penalties. You may even find yourself behind bars or losing one of your favourite or precious belongings. Such liabilities may include mortgages or child support. You should consider paying such liabilities as soon as possible to evade the penalties.
- Paying debts to people who you want to retain a good relationship with
Some organizations or creditors are those you want to keep a good relationship with. Maybe for future assistance or how willing such an organization was when crediting you, you will consider keeping a good relationship with them to payback gratitude shown.
- Small debts
Paying off small arrears withdraws pressure and motivates you to pay larger debts. They ignite you to start on repaying the big arrears. Paying off small debts help improve creditor’s trust in you. Therefore, clearing these arrears will put you in a better position to receive credit in the future.
5 Steps to Close Your Debt
- Identify your debts
Before you start paying your debt, first you need to identify the arrears that you have and how much they accumulate to. Arrange them from the one you owe most to the least liability, from the urgent liabilities to the least urgent ones. Identifying your arrears will help you prioritize on which arrears to pay first.
- Balance your budget expenses
You will also need to plan and reduce your budget to a sustainable amount. You can reduce the entertainment fund, for instance, gamblers who like to play at online casinos may switch to low wagering casinos and save money and still have fun. It is also advisable to stop amassing more debt, no matter how good your plan is, you cannot stay debt-free if you continue adding more debt to existing arrears. Just live within your budget limits.
- Identify the resources you have
After listing all the debts you have, the next step is planning on how to pay them back. So, you have to identify what you have to pay them. You should list the amount of money you have at hand, the amount at the bank as well as money other people or organizations are owing you. This will help you to know if you have enough or less at your disposal. Depending on the resources you have, you will decide on how and which liability to tackle.
- Decide which debt to close first
You may have more than one debt that you need to handle. It is wise first to handle debts that will give you a massive boost from an economic perspective: it may be liabilities with higher interest or principal. For instance, You have £1000 debt with an interest rate of 5% and another loan of £100 of a simple interest of 10%, it may be wise to pay the £1000 loan even though it has lower interest rate compared to the £100 credit because it will accrue higher amounts because of the huge principal amount. You may also consider paying the debt, which you may want to keep a good relationship with the creditor maybe for future borrowing or refinancing your arrears by borrowing a low-interest rate debt to clear a high-interest liability. This step is essential because it helps you decide which and why to pay the debt.
- Tap into your extra income
Try to tap into your extra income if you have any or look for extra revenue-generating activity if you do not have one. Salary may not be enough, paying dues and sustaining yourself with the same wage may be impossible. This can help you to pay off your arrears faster. You can also consider selling stuff that you do not need to add more cash.
Debt is prevalent among many people. The process of settling your arrears may be complicated if you do not plan properly. First, you need to analyze your debts to decide what to pay first. Once you have determined your arrears in their level of priority, you can then follow the abovementioned procedure to help settle your debt.