By Philippa Billings, Head of Advice, Otivo
Two people, each with the same three debts — a $2,000 store card at 22 percent, an $8,000 car loan at 9 percent, a $4,000 personal loan at 13 percent. One attacks the 22 percent card first because the maths says so. The other clears the smallest debt first because finished feels like winning. A year later, both are ahead of where they started, and each swears by their method. That's the avalanche versus snowball debate in miniature — one strategy optimises interest, the other optimises motivation, and the honest answer about which is better depends on which fuel a person actually runs on. Here's how both work.
The avalanche method directs all spare repayments at the debt with the highest interest rate while paying minimums on the rest, minimising total interest paid. The snowball method targets the smallest balance first, producing quick wins that sustain motivation. Both require paying every minimum on time, and research suggests the method a person sticks with matters more than the method itself.
How does the debt avalanche work?
Rank every debt by interest rate, highest first. Pay the minimum on all of them — non-negotiable, since missed minimums trigger fees and credit damage. Then send every spare dollar at the debt with the highest rate until it's gone, roll that entire repayment onto the next-highest rate, and repeat.
The logic is pure arithmetic. The highest-rate debt is the most expensive to keep alive, so killing it first minimises total interest paid across the journey. In the example above, the avalanche goes store card, then personal loan, then car loan — and over the full repayment, it always costs less in interest than any other ordering. When rate gaps are wide, as they are between credit cards and car loans, the difference can run to hundreds or thousands of dollars.
The avalanche's weakness has nothing to do with maths. If the highest-rate debt is also the biggest, the first finish line can be a long way off — and a long stretch without a visible win is where repayment plans quietly die.
How does the debt snowball work?
Rank every debt by balance, smallest first. Minimums on everything, then all spare money at the smallest balance. When it's cleared, roll the freed-up repayment onto the next smallest — the snowball gathering size as it goes.
The logic here is behavioural. A cleared debt is a visible, irreversible win — one fewer statement, one fewer direct debit, proof the plan works. Those wins arrive fastest when the smallest debts go first, and momentum is the point. The method concedes some interest to the avalanche in exchange for a stream of finish lines.
That concession is real, and it's also frequently smaller than people assume — when debts have similar rates, the orderings converge and the interest gap shrinks towards nothing. What doesn't shrink is the completion effect. Research on debt repayment behaviour, including work published in the Journal of Marketing Research, has found that concentrating repayments and closing accounts sooner is associated with a greater likelihood of finishing — people who feel progress keep going.
What do both methods demand regardless?
Three shared rules — the part of the debate nobody argues about.
- Every minimum, every month. Both methods build on top of minimum repayments, never instead of them.
- One target at a time. Spreading spare money thinly across all debts is the strategy both methods exist to replace — concentration is what makes either work.
- No new debt behind the lines. A repayment plan with fresh spending accumulating on the cleared cards is a treadmill. Some people close accounts as they're paid off, others reduce limits — either beats leaving temptation at full strength.
The worst strategy remains the one the video generation grew up hearing — no strategy, just minimums forever, which at typical credit card rates can stretch a modest balance across decades. ASIC's MoneySmart shows exactly this on every card statement's minimum repayment warning.
How does someone choose between them?
By self-diagnosis rather than doctrine. The avalanche suits people who find spreadsheets motivating, whose largest debt isn't wildly bigger than the rest, or whose rate gaps are wide enough that the interest saving is worth real money. The snowball suits people who've started plans before and abandoned them, who need evidence early, or whose smallest debts are irritants worth clearing for peace alone. A hybrid is common too — snowball the first small debt for the win, then switch to avalanche ordering.
The harder question usually isn't the ordering — it's how much spare money the budget can genuinely sustain, month after month, without snapping. That's where Otivo's debt module earns its place, weighing debt types, repayment details, household income, and expenses to find effective ways to pay debt down while still covering essentials, as regulated advice under AFSL and Australian Credit Licence No. 485665. When customers follow Otivo's advice in full, they could be better off on average by $52,030 through faster debt repayment.
Frequently asked questions
Should extra money go to debt or savings first?
Many people build a small emergency buffer before accelerating debt repayment, because a plan with no buffer meets its first car repair on a credit card — undoing the progress. The balance between the two depends on how secure the household's income is and the interest rates involved.
Does debt consolidation beat both methods?
Consolidation — rolling several debts into one loan at a lower rate — can reduce interest and simplify repayments, but it works only if the underlying spending stops and the fees don't eat the saving. It's a restructuring tool, and either repayment method can run on top of it.
Do these methods work for a mortgage too?
The principles transfer — concentrate spare money where it does the most good — but mortgages usually carry the lowest rate a household has, which is why both methods typically rank them last, behind cards and personal loans.
Sources
- ASIC MoneySmart — Get debt under control. moneysmart.gov.au/managing-debt/get-debt-under-control
- ASIC MoneySmart — Credit card calculator. moneysmart.gov.au/credit-cards/credit-card-calculator
- Journal of Marketing Research — Winning the battle but losing the war, the psychology of debt management. journals.sagepub.com/doi/10.1509/jmr.14.0281
Disclaimer
The information in this communication is current as at July 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.