Pay off pecking order

Eeeny, meany, miney, mo, catch a debt by its toe. And pay it off. Assuming you have the money, whether in savings or increased income, to facilitate your repayment, should settlement of debts be so random? No. As a general financial rule, it makes economic sense to prioritise debt repayment according to the amount of interest being charged; the higher the interest the quicker you should want to settle the debt.

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Facing the music

First of all though, you need to know exactly what you owe and what interest rates you are paying. Remarkably, statistics from Creditaction suggest that only 51% of the British population know the balance on their credit cards and 46% have no idea what interest rates they pay on debts and accounts or what they receive on savings.

Such a cavalier attitude to fiscal planning may explain why personal debt as a proportion of income has risen from 105% in 1997 to 164% in 2006; this is the highest level ever recorded in the UK and the highest in the developed world. By mid 2007 total UK personal debt was £1,345 billion and total mortgages/secured lending reached £1,131 billion.

Getting to grips with the ins and outs

Are you fully aware of the terms and conditions of the credit agreement? Have you read the small print? And do you, for instance, understand the difference between simple and compound interest? Simple interest is the application of a percentage rate to the principal sum for the period in question; compound interest is interest on the principal sum, plus the accruing interest. For example, with a compound interest rate of 7% a balance will double itself in 10 years and 89 days, whereas it takes14 years and 104 days for a balance to double when it's priced at 7% simple interest.

If it's any consolation, lending of money at interest was forbidden in this country in the Middle Ages; people were even hanged for the offence.Henry VIII, in 1545, legalised the taking of interest on loans (but interest payable on savings or deposit accounts didnt become the norm until later on in that century).

31 August 2007 © Moneyextra.com

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