By Philippa Billings, Head of Advice and Compliance
The most effective way to pay off debt faster is to direct any surplus income towards the highest-interest debt first — a method commonly called the avalanche approach. Doing this consistently, while keeping essential expenses covered, reduces the total interest paid over the life of the debt and shortens the repayment timeline significantly. It sounds straightforward, but in practice, most people find that getting a clear picture of their full debt situation is the first challenge — and the most important step.
Why debt costs more than most people realise
Interest charges compound. On a credit card with a balance of $8,000 and an interest rate of 20% per year, making only minimum repayments could take well over a decade to pay off and cost thousands of dollars in interest on top of the original balance. A personal loan at 13% and a home loan at 6% feel very different — but over a long mortgage term, even a small interest rate has a large cumulative effect.
Understanding the true cost of each debt — including the interest rate, the remaining balance, and the estimated time to pay off at current repayment levels — is the foundation of any debt reduction plan.
Two common approaches to paying off debt
The avalanche method prioritises the highest-interest debt first. All available surplus income goes towards the most expensive debt while minimum payments are maintained on others. Once the highest-interest debt is eliminated, that freed-up repayment amount is redirected to the next. This approach minimises total interest paid.
The snowball method prioritises the smallest balance first, regardless of interest rate. The appeal is psychological — clearing a debt entirely provides a motivational win that can keep people on track. Some people find this approach more sustainable even if it costs slightly more in interest overall.
Many people end up using a blend of both: tackling a small, high-interest debt first for the psychological boost, then applying the avalanche approach to the remainder.
How much does an extra repayment actually make?
This is where it gets genuinely surprising. On a $450,000 home loan at 6% over 30 years, making an extra $500 per month in repayments could cut more than 8 years from the loan term and save well over $100,000 in interest. Even an extra $100 per fortnight makes a measurable difference over time.
The key is consistency. Ad hoc lump sums help, but a reliable extra payment each month is typically more effective because it compounds over the entire life of the loan.
What about the relationship between debt and super contributions?
This is a question many Australians wrestle with, particularly those in their 40s and 50s: should surplus income go towards extra mortgage repayments or extra super contributions?
There's no universal answer. It depends on the interest rate on the debt compared to the expected after-tax return on super, the number of years until retirement, and the tax benefits attached to super contributions. For some people, the after-tax return on concessional super contributions — boosted by the 15% contributions tax compared to a higher marginal rate — makes extra super contributions more effective than extra mortgage repayments at certain income levels.
The honest answer is that this calculation benefits from being modelled properly. Otivo's debt advice module helps people find effective ways to pay down debt while covering essential expenses, taking into account debt types, repayment details, household income and expenses. When customers follow this advice in full, they're better off on average by $52,030 across credit cards and home loans — which reflects the compounding power of redirecting surplus income more efficiently.
Credit card debt: why it deserves urgent attention
Credit cards typically carry the highest interest rates of any common debt product — often 18–22% per year. At those rates, carrying a balance month-to-month is extremely costly. Many people find that consolidating credit card debt onto a personal loan at a lower rate, or using a balance transfer offer carefully, can significantly reduce the interest burden while a repayment plan is executed.
A note on balance transfers: the 0% promotional period can be genuinely useful, but only if the balance is paid off before the rate reverts to the standard rate (often 22% or higher). Carrying a residual balance when the promotional period ends can result in a sharp jump in costs.
What role does budgeting play?
Identifying surplus income — the amount left after covering genuine essential expenses — is the critical input for any debt repayment plan. Many people significantly overestimate their monthly surplus, which is why a detailed look at actual spending is often a useful starting point.
A budget doesn't need to be complicated. Categorising spending into essentials (rent or mortgage, groceries, utilities, transport) and discretionary items (dining out, subscriptions, entertainment) can quickly reveal where surplus exists and where spending could be trimmed if repaying debt faster is a priority.
Frequently asked questions
What is the fastest way to pay off credit card debt?
Stopping new spending on the card and directing as much surplus income as possible towards the balance each month — well above the minimum payment — is the most effective approach. If the interest rate is very high, exploring a balance transfer to a lower-rate product may help reduce the interest cost while repayments continue.
Should I pay off my mortgage or top up super first?
This depends on individual circumstances including the mortgage interest rate, marginal tax rate, age, and existing super balance. At certain income levels and super balances, the tax benefit of concessional super contributions can outweigh the after-tax benefit of extra mortgage repayments. A retirement calculator or licensed financial advice tool can model the comparison for a specific situation.
Does paying off debt early save money?
Almost always, yes. The earlier a debt is repaid, the less interest accrues. Even small additional repayments made consistently from the early years of a loan compound significantly over the full loan term. The savings are largest for long-term loans like mortgages and lowest for short-term, lower-rate debts.
How do I know if I have too much debt?
A common benchmark used by financial professionals is that total debt repayments (excluding mortgage) shouldn't exceed 15–20% of after-tax income. A mortgage repayment-to-income ratio above 30–35% of gross income can signal financial stress. These are rough guides, not hard rules, and individual circumstances vary significantly.
Clearing debt creates financial freedom
Debt isn't always bad — a mortgage on a sensibly priced property, for example, is a tool many Australians use to build long-term wealth. But high-interest consumer debt, or a mortgage that leaves very little room for other goals, can genuinely constrain financial wellbeing and retirement readiness.
Getting a clear picture of the full debt position, understanding the true cost of each debt, and building a structured repayment approach are steps that can meaningfully improve someone's financial situation — and free up income for the retirement savings that matter in the long run.
Whether someone uses a digital tool like Otivo, a retirement planner, or works through the numbers themselves, the starting point is the same: honest clarity about what's owed, and a realistic plan for what to do about it.
Disclaimer
The information in this communication is current as at April 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.