Paying off debt ‘should be number one priority’

The first priority for anyone with a disposable income and the chance to use it to improve their financial circumstances should be paying off debt, an expert has said.

Director of financial charity Credit Action Richard Talbot said the current base rate means the benefits of reducing what people owe are greater than those of saving money up, as the latter option attracts very little interest at the moment.

He stated: “I would have thought with the low interest rates on savings and the high interest rates on debt that, if people can do one or the other, they would try and pay down debt.”

Mr Talbot emphasised that this does not mean people should not have some savings, stating that there is a need to strike a “balance” and ideally people should have some money put aside for a rainy day.

One risk of not doing this is that a higher level of debt can arise if people have to borrow to pay for emergency spending – such as repairing an electrical appliance – when savings could have covered the cost.

But once an emergency fund is in place the priority must be “to pay off the highest interest rate debt first”, Mr Talbot concluded.

Some may find it beneficial to pay off more debt before interest rates go up, as this would mean they do not find payments rising as much as they would and can concentrate more on savings later when returns are higher.

A Lloyds TSB survey at the start of the year found sorting out finances – including saving and borrowing levels – was the most popular new year’s resolution after losing weight and getting fit.

By James Francis