By Paul Feeney, Founder and Chief Executive Officer, Otivo

It's Thursday night. The pay has landed, the bills are paid, and there's a few hundred dollars spare. On the kitchen table: a credit card statement, a car loan, a personal loan, and a screenshot of three Buy Now Pay Later balances. Where does the extra money go?

This is the question most people answer wrongly — not because the maths is hard, but because the maths and the psychology pull in opposite directions. The mathematically optimal answer can take eighteen months to produce a visible win. The psychologically motivating answer can cost thousands in extra interest. And there's a third option that ducks the trade-off entirely. The typical Australian household isn't dealing with one debt. It's dealing with five or six — and the question of which to attack first is the central practical problem in personal debt management.

Quick answer

When juggling multiple debts, the two most common repayment approaches are the avalanche method (pay the highest-interest debt first) and the snowball method (pay the smallest balance first). Avalanche minimises total interest paid; snowball builds momentum by clearing accounts faster. A third option is consolidation — combining multiple debts into a single facility. As at May 2026, no single approach suits every situation; the best fit depends on debt mix, interest rates, and the borrower's circumstances.

What's the typical Australian household debt mix?

Before picking a repayment method, it helps to know what's actually being repaid. The figures in this article come from Otivo's analysis of household debt across Australian postcodes — a dataset that breaks borrowing into six categories (owner-occupied mortgages, investment property loans, unsecured personal loans, credit cards, "other loans" like car and store finance, and Buy Now Pay Later) and aggregates them by location.

The averages give a useful starting point. Across Australian postcodes, the typical household debt profile looks roughly like this: around $336,000 in owner-occupied mortgage debt, around $189,000 in investment property debt, about $19,000 in unsecured personal loans, around $9,000 on revolving credit cards, $26,000 in "other loans," and a couple of thousand in BNPL.

The composition varies wildly by postcode. Wealthy harbourside suburbs in Sydney concentrate almost everything in mortgages — one eastern Sydney postcode averages $4.8 million in good debt per household with very little in any other category. Some regional postcodes show very little mortgage debt but substantial unsecured borrowing. What's consistent across the board is the number of separate accounts. The typical Australian isn't deciding how to pay off one debt — they're deciding how to allocate limited extra repayment capacity across several at once, each with its own balance, due date, and interest rate.

That's the picture that makes the avalanche-vs-snowball question genuinely hard. If everyone had one debt, the choice would be trivial. They don't, and it isn't.

What is the avalanche method?

The avalanche method follows the maths. List every debt with its current balance and its interest rate. Direct any spare repayment capacity at the debt with the highest interest rate, while making minimum payments on everything else. When that debt is cleared, the freed-up cash flow rolls over to the next-highest rate, and so on.

On paper, this is the most efficient approach. Every extra dollar paid against the highest-rate debt saves the most in future interest. Across a typical Australian debt mix — a 6% mortgage, an 8% car loan, a 13% personal loan, a 20% credit card, a BNPL plan with no interest but late fees — the avalanche method would tackle the credit card first, then the personal loan, then the car loan.

The catch is psychological. The highest-rate debt isn't always the smallest. If the credit card has a $9,000 balance and the personal loan only has $1,500 left, the avalanche approach can mean six months of effort before any debt is actually cleared. For some people, that's fine. For others, the absence of a visible win makes it hard to keep going.

What is the snowball method?

The snowball method goes the other way. List every debt by balance, smallest to largest, and attack the smallest first regardless of its interest rate. Minimum payments continue on the others. When the smallest is cleared, the cash freed up by closing that account rolls onto the next-smallest, and so on.

Applied to the same household — a $500 BNPL balance, a $1,500 personal loan, a $9,000 credit card, a $14,000 car loan — the snowball approach would clear the BNPL within a fortnight, the personal loan within a few months, and so on up the list.

The maths is slightly worse than avalanche, sometimes meaningfully so. But the behavioural argument is straightforward: the first debt clears quickly, which generates a real sense of progress, which makes the second debt feel achievable. The "snowball" name comes from this compounding momentum.

For people carrying several small balances — a few BNPL accounts, a small credit card, a store finance arrangement — the snowball approach can clear half the open accounts within a few months. The psychological lift of going from six open debts to three is hard to overstate.

Which one works better?

Honestly, the one a person will stick to.

That sounds glib, but the research backs it. A study published in the Journal of Marketing Research found that consumers who concentrated their repayments on the smallest balance first — the snowball approach — were significantly more likely to eliminate their entire debt load than those who optimised purely on interest rate. The reason wasn't a maths discovery. It was engagement. Visible progress sustains the effort required to keep going for the year or two it usually takes to clear multiple debts.

That doesn't make snowball universally right. For people who are confident in their ability to stay disciplined over a long period, or whose debts have very different interest rates, avalanche can save thousands of dollars in interest. The decision is really about temperament and timeline.

A workable middle ground is to use snowball for the first two or three debts (to build momentum) and then switch to avalanche once the open-accounts list is shorter. The early wins handle the motivation problem; the later switch handles the maths problem.

What about consolidation?

A third option sits separately from both avalanche and snowball: consolidating multiple debts into a single facility, usually at a lower interest rate.

The most common forms are a personal consolidation loan (taking out a new loan to pay off several existing debts), a balance transfer credit card (moving credit card debt to a card with a low or zero introductory rate for a fixed period), or a refinance into a home loan (where one is available). Each can simplify the picture — one payment, one due date, one interest rate — and often reduces the total interest paid.

For the typical Australian household carrying five or six separate debts, consolidation has a second benefit beyond interest savings: it cuts the administrative load. Five direct debits become one. Five due dates become one. The cognitive cost of managing multiple accounts is easy to underestimate.

Consolidation comes with conditions worth checking. The new interest rate matters: it needs to be meaningfully below the average of the rates being consolidated for the maths to work. The term of the new loan matters too — a lower rate spread over a longer period can end up costing more in total interest, even if the monthly payment looks lower. And consolidation only works if the underlying spending patterns that created the debts don't continue to add new balances on the cleared accounts.

The order that matters most before either method

Before choosing between avalanche, snowball, or consolidation, two debts almost always belong at the top of the list regardless of approach.

The first is anything in default or about to be referred to collections. The interest rate is one thing; the longer-term credit impact of a defaulted account is another, and that consideration usually outweighs the marginal interest savings of any other approach.

The second is any debt with a behavioural trigger. If a particular credit card is being used to fund spending that wouldn't otherwise happen, freezing the card while paying it down often does more for the overall picture than optimising the repayment order on paper.

After those, the choice between the three approaches is largely about fit.

Frequently asked questions

Should I make minimum payments on everything while I focus on one debt?

Yes. Whichever approach is being used — avalanche, snowball, or consolidation — minimum payments still need to be made on every other open debt to avoid late fees and credit reporting impacts. The "extra" repayment capacity is what gets directed at the priority debt.

Does it matter if some of my debts are secured and others aren't?

It can. Secured debts like home loans and car loans tend to have lower interest rates than unsecured debts like credit cards and BNPL. The avalanche method usually already reflects this — secured debts naturally drop down the priority order because their rates are lower. The exception is when missing payments would put a secured asset at risk; in that case, keeping the secured debt current usually takes precedence regardless of interest rate.

Is it worth paying off debt before saving?

The general rule is that debt with an interest rate above the expected return on savings is worth tackling first, because the guaranteed "return" of paying down high-interest debt usually exceeds the after-tax return on cash. Maintaining a small emergency buffer alongside debt repayment is a common middle path — enough to avoid having to take on new debt for an unexpected expense.

Where to from here

The avalanche, snowball, and consolidation approaches are tools — not rules. Which one fits depends on the specific mix of debts, interest rates, and the borrower's appetite for a slow-and-steady versus a quick-wins approach. Otivo's debt advice module — provided under AFSL and Australian Credit Licence No. 485665 — is designed to model these approaches against an actual debt position, including the impact of restructuring or consolidating where it makes sense.

Sources

• Otivo postcode-level household debt analysis, May 2025. Aggregated household debt data across Australian postcodes covering six debt categories.
• Gal, D. & McShane, B.B. (2012). "Can small victories help win the war? Evidence from consumer debt management." Journal of Marketing Research, 49(4), 487-501.
• ASIC MoneySmart, "Get debt under control." moneysmart.gov.au/managing-debt/get-debt-under-control

Disclaimer

The information in this communication is current as at May 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.