By Catherine Mulholland, Head of Client Services, Otivo
With the cash rate at 4.60% after four rises this year, every extra dollar put towards debt has to work harder. Most households carrying more than one debt face the same question. Which one goes first? There are two well-known answers, and they disagree. One saves the most interest. The other clears a debt sooner. Here's how each works, what the difference looks like in real numbers, and why the "right" order depends on more than maths.
Many Australians choose between two debt repayment methods. The avalanche method directs extra repayments to the highest-interest debt first, which minimises total interest. The snowball method targets the smallest balance first, clearing a debt sooner. Both start with minimum repayments on every debt. With the RBA cash rate at 4.60% in October 2026, interest costs matter more.
Why does the order of debt repayment matter more when rates rise?
When interest rates rise, the cost of carrying debt rises with them, particularly on variable-rate loans. The RBA lifted the cash rate four times in 2026, to 4.60% on 29 September. Each dollar of debt left unpaid costs more to hold, so where extra repayments go makes a bigger difference to the total.
How a debt's rate is set matters too. Variable-rate debts can rise when lenders pass on rate changes. Fixed-rate debts don't change until their fixed term ends.
How does the avalanche method work?
The avalanche method puts every spare dollar, after minimum repayments, towards the debt with the highest interest rate. Once that debt is gone, the money moves to the next-highest rate.
- List every debt with its balance and interest rate.
- Keep paying the minimum on all of them.
- Put any extra money towards the highest-rate debt.
- When it's cleared, roll that whole repayment onto the next-highest rate.
Because the most expensive debt shrinks first, the avalanche method generally minimises the total interest paid.
How does the snowball method work?
The snowball method puts extra repayments towards the smallest balance first, regardless of its interest rate. Each cleared debt frees up its repayment, which then rolls onto the next-smallest balance and grows like a snowball.
- List every debt from smallest balance to largest.
- Keep paying the minimum on all of them.
- Put any extra money towards the smallest balance.
- When it's cleared, roll that whole repayment onto the next-smallest.
The snowball method usually costs more in interest, but it produces an early win. Some people find that early win is what keeps them going.
What's the difference in real numbers?
Take a household with three debts, paying $1,170 a month in total. That's $870 in minimum repayments plus $300 extra. The debts and rates are hypothetical.
- Credit card — Balance: $9,000 | Interest rate: 20% | Minimum repayment: $270 a month
- Personal loan — Balance: $4,000 | Interest rate: 13% | Minimum repayment: $180 a month
- Car loan — Balance: $18,000 | Interest rate: 8% | Minimum repayment: $420 a month
- Avalanche (card first): First debt cleared in month 19 | All debts cleared in month 31 | Total interest paid: about $4,549
- Snowball (personal loan first): First debt cleared in month 9 | All debts cleared in month 31 | Total interest paid: about $4,784
The avalanche method saves about $235 in interest in this example. The snowball method clears the first debt ten months earlier. Both finish at the same time here, because the same total amount goes to debt each month.
The gap between the two methods widens when the high-rate debt is also large, and narrows when interest rates are similar across debts.
Which method suits which situation?
The two methods suit different priorities. The avalanche method suits people focused on the lowest total cost, who are comfortable waiting longer to see a debt disappear. The snowball method suits people who value visible progress, or who have several small debts and want fewer bills to track.
A common consideration is the gap between rates. Where one debt's rate is far higher than the others, such as a credit card charging 20% beside a car loan at 8%, the avalanche method's advantage grows. Where rates are close, the difference in interest is often small, and the motivational benefit of the snowball may matter more.
For a 29-year-old with a credit card, a personal loan and a car loan, either method is a structured improvement on spreading spare money thinly across all three.
What if repayments are already hard to meet?
Both methods assume there's money left over after minimum repayments. When there isn't, the conversation is different. Lenders have hardship processes for customers who can't meet repayments, and the National Debt Helpline (1800 007 007) offers free, confidential financial counselling.
Frequently asked questions
Is the avalanche or snowball method better?
The avalanche method generally costs less in total interest. The snowball method clears individual debts sooner. Which suits someone depends on whether lower cost or faster visible progress matters more to them.
Is the mortgage usually part of the list?
Many people treat the mortgage separately, because it usually has a lower rate and a much longer term than other debts. Including it in an avalanche list usually places it last.
Do credit card rates rise when the cash rate rises?
Card issuers set their own rates, and card rates don't always move in step with the cash rate. The terms of each card set out how its rate can change.
Can a financial advisor help with debt?
Adviser and advisor are two spellings of the same role. In Australia, only people listed on ASIC's Financial Adviser Register can use the title. Free financial counsellors through the National Debt Helpline are another option.
Choosing a repayment order turns spare money into a plan instead of a guess. Otivo's debt advice helps people find effective ways to pay down debt while still covering essentials, considering common debt types, repayment details, household income and expenses. Otivo Pty Ltd holds AFSL and Australian Credit Licence No. 485665.
Sources
- Reserve Bank of Australia, Statement by the Monetary Policy Board: Monetary Policy Decision, 29 September 2026. rba.gov.au
- National Debt Helpline. 1800 007 007. ndh.org.au
Disclaimer
The information in this communication is current as at October 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.