The debt avalanche method usually clears multiple debts with the least interest because it targets the highest interest rate first. The debt snowball targets the smallest balance first, which can produce a quicker win and make the plan easier to maintain. Neither method is automatically right for every Australian household.
Debt snowball vs debt avalanche at a glance
| Factor | Debt snowball | Debt avalanche |
|---|---|---|
| First target | Smallest balance | Highest interest rate |
| Main advantage | Fast visible progress | Usually lowest total interest |
| Main weakness | May leave expensive debt running longer | The first payoff may take longer |
| Best suited to | People motivated by quick wins and fewer accounts | People focused on cost and comfortable following the numbers |
| Minimum repayments | Continue on every non-target debt | Continue on every non-target debt |
| Extra repayment | Direct all available extra money to the smallest balance | Direct all available extra money to the highest-rate balance |
How the debt snowball works
List eligible debts from the smallest balance to the largest, regardless of interest rate. Pay at least the required amount on every debt, then direct all additional repayment money to the smallest one. When it is cleared, roll its old payment and your extra amount into the next-smallest debt.
The method gains momentum because the amount available for the next account grows after each payoff. It can also reduce the number of statements, due dates and minimum payments relatively quickly.
Why it can work
Debt repayment is partly behavioural. A mathematically efficient plan has little value if it is abandoned. Closing an account can provide evidence that the sacrifice is working, which may help some people resist taking on new debt.
What it can cost
A small low-rate loan may be cleared while a larger credit-card balance continues attracting much higher interest. The difference can be substantial when rates and balances are far apart or repayment takes several years.
How the debt avalanche works
List debts from the highest interest rate to the lowest. Maintain every required minimum, then direct all extra money to the highest-rate debt. After clearing it, roll the freed payment into the debt with the next-highest rate.
Because each extra dollar attacks the most expensive balance, the avalanche normally minimises total interest when repayments, fees and other conditions remain equal.
Why it can be difficult
The highest-rate account may also have a large balance. Months can pass before an account disappears, even though the plan is saving interest. Track the falling balance and monthly interest charge so progress remains visible.
A simple Australian example
Suppose you can meet all required repayments and have another $400 a month to direct to one target debt.
| Debt | Balance | Interest rate | Snowball order | Avalanche order |
|---|---|---|---|---|
| Personal loan | $2,000 | 9% | 1 | 2 |
| Credit card | $5,000 | 22% | 2 | 1 |
| Car loan | $12,000 | 8% | 3 | 3 |
The snowball closes the $2,000 personal loan first. The avalanche attacks the 22% credit card first. The exact time and interest difference depends on required repayments, compounding, fees and whether rates change, so use current statements or a reputable repayment calculator rather than this simplified order alone.
Deal with priority bills before choosing a method
Snowball and avalanche are ways to arrange affordable extra repayments. They do not determine which consequences are most urgent. Moneysmart identifies rent or mortgage payments, council rates or body corporate fees, essential utilities and essential car repayments among higher-priority commitments.
Arrears involving housing, essential services, secured assets, fines, tax or child support can require a different response from ordinary unsecured debt. Obtain free financial counselling if you are unsure what to pay first.
How to build your debt list
Use current statements rather than estimates. Record:
- the lender and account;
- the current balance;
- the annual interest rate;
- monthly or annual fees;
- the required repayment and due date;
- whether the rate is promotional or variable;
- when any interest-free period ends; and
- whether early repayment attracts a fee.
Include credit cards, personal loans, car finance, buy now pay later balances, payday loans, overdue bills and other money owed. A fee-heavy product may be expensive even when its advertised interest rate is low or zero.
Which method should you choose?
Choose the avalanche when
- interest rates differ substantially;
- you are motivated by measurable savings;
- you can follow the plan even if the first account takes time to clear;
- high-interest credit-card or payday debt is growing quickly; and
- you want the mathematically cheaper route.
Choose the snowball when
- several small accounts make your finances difficult to manage;
- a quick payoff will improve motivation;
- closing one balance will free a useful required payment;
- rates are fairly similar; or
- previous cost-focused plans have not lasted.
Consider a hybrid when
One very small debt could be cleared quickly but another account charges a much higher rate. Close the small balance for momentum, then switch immediately to the highest-rate debt. Write down the switch point in advance so a “temporary” detour does not continue indefinitely.
Keep a small emergency buffer
Sending every available dollar to debt can backfire if a car repair, medical bill or urgent household expense sends you straight back to a credit card. Keep an accessible buffer suited to your risks while still preventing expensive balances from growing unnecessarily.
The right amount depends on income stability, dependants, insurance, available leave and upcoming costs. Someone in hardship may need to focus first on stabilising cash flow rather than building a conventional multi-month emergency fund.
Should you use a balance transfer?
A lower-rate or 0% balance transfer may reduce interest, but it is not a repayment method by itself. Check the transfer fee, promotional period, revert rate, annual fee, eligible balances and required repayments. Purchases on the new card may be treated differently.
Divide the transferred balance by the number of months in the promotional period to see what must be paid each month to clear it on time. Do not use the old card again simply because its balance has moved.
What about debt consolidation or refinancing?
Combining debts can simplify repayments and may reduce the rate, but a lower monthly payment can result from stretching the debt over a longer term. Compare the total amount repayable after establishment fees, ongoing fees and any early-exit costs.
Be especially cautious about converting unsecured debt into debt secured against your home. The interest rate may fall, but the consequences of default become more serious and a long loan term can increase total interest.
If you cannot afford the minimum repayments
Contact the lender’s hardship team early. Financial hardship assistance may involve temporarily altered repayments or a payment plan. Agree only to an amount you can afford and keep records of conversations and arrangements.
The National Debt Helpline provides free, confidential and independent financial counselling on 1800 007 007. A counsellor can help with a budget, priorities, creditor negotiations and options that fit your circumstances.
Common mistakes to avoid
- Paying only one lender: Missing required payments elsewhere can create fees, arrears and defaults.
- Ignoring fees: A nominally interest-free debt can still be costly.
- Using old balances: Rates and amounts change, so update the plan from statements.
- Closing the emergency gap: An overaggressive payment can force fresh borrowing.
- Continuing to spend on cleared accounts: The method fails if repaid balances return.
- Extending debt without comparing total cost: A smaller repayment is not automatically cheaper.
- Applying the method to priority arrears blindly: Consequences matter as well as rates.
- Switching methods every month: Consistency matters more than repeatedly redesigning the spreadsheet.
A practical repayment process
- List every debt and overdue bill. Record balances, rates, fees, minimums and due dates.
- Protect essentials. Budget for housing, food, utilities, medication and essential transport.
- Address urgent arrears. Seek advice when missed payments could threaten housing, services or secured property.
- Set minimum payments. Automate them where this is safe for your cash flow.
- Choose the target order. Smallest balance, highest rate or a written hybrid.
- Set a realistic extra amount. Leave room for irregular but predictable expenses.
- Roll payments forward. When one debt ends, redirect its full old payment to the next target.
- Prevent new balances. Reduce limits, remove stored card details or close unnecessary accounts where appropriate.
- Review monthly. Update balances and check interest and fees.
- Ask for help early. Contact hardship teams and a free financial counsellor if the plan stops being affordable.
Frequently asked questions
Which method pays debt off fastest?
With the same total repayments, the avalanche usually finishes sooner and costs less when it consistently targets the highest effective interest cost. The snowball may work faster in practice for someone who is more likely to maintain it.
Should I include my mortgage?
Usually treat the mortgage as a required priority payment while first addressing expensive consumer debt. Extra mortgage repayments involve different questions about offset accounts, redraw, rates, tax and liquidity.
What if two debts have the same interest rate?
Target the smaller balance for a faster closure, unless fees, promotional deadlines, secured status or other consequences give the other debt priority.
Should I close a credit card after paying it off?
Closing or reducing the limit can remove temptation and fees, but consider legitimate emergency needs, recurring payments and the effect on available credit. Never keep an unsuitable card solely because you fear any change to your credit score.
Can I switch methods?
Yes. A deliberate switch can be sensible when rates change, a promotional period ends or motivation fades. Avoid frequent emotional changes that scatter extra payments without clearing anything.
Is the snowball always much more expensive?
No. If balances are small and rates similar, the difference may be modest. If a large high-rate balance is postponed behind low-rate debts, the additional interest can be significant. Calculate using your actual accounts.
Sources and further reading
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