Dealing with Debt

Before you Begin: Are you reliant on debt to make ends meet? If you are are relying on debt to meet your livings costs you may be in financial hardship. Contact Financial Counselling Australia for a referral, or better yet directly contact the National Debt Helpline on 1800 007 007.

I want to be debt free. How can I do this?

Work out which debts are your priority debts and try to pay them first if you can. Priority debts include rent or mortgage payments, council rates and body corporate fees, electricity, gas and water, car repayments — if you need your car for work or essential travel.

If you can’t keep on top of these you can request financial hardship. You could also request financial hardship for lower priority debts like internet and phone bills, credit cards, payday loans or consumer leases 

The National Debt Helpline has a step-by-step guide and can help you to prioritise your debts.

Having an emergency fund built up can help you avoid getting back into debt again.

I have some extra money each fortnight/month. How should I tackle repaying my debt?

The two most common personal finance approaches to paying down debt are know as the avalanche method and the snowball method. Both are acceptable, but will appeal to different people. What’s right for you?

The avalanche method focuses on paying down your highest interest debt first. This method will have you paying the least amount of interest overall, but requires more willpower. The snowball method will result in paying more interest, but can give you a sense of achievement and momentum as you win along the way.

The Avalanche Method

This method focuses on the most expensive debts first. Using the debt avalanche method, you maintain minimum repayments on all your debts, but direct any surplus cashflow to focus on paying off whichever of your debts has the highest interest. Once this debt is paid off, you move on to the next debt, and so on.

In practice and in order of highest interest to least, this would look like: payday loans first, then credit cards, then personal loans, then home loans, then HECS if you have it.

The Snowball Method

This method was popularised by Dave Ramsay, who has the following to say:

“The debt snowball works because it’s all about behavior modification, not math. When it all boils down, hope has more to do with this equation than math ever will.

If you start paying on the student loan first because it’s the largest debt, you won’t get rid of it for a while. You’ll see numbers going down on the balance, but pretty soon you’ll lose steam and stop paying extra. Why? Because it’s taking forever to get a win! And you’ll still have all your other small, annoying debts hanging around too.”

Which one should I choose?

When it comes to getting on top of debt, the most important thing is to get started. If one method isn’t working for, make a change and try something else.

The avalanche method is quicker and results in paying less interest, but is harder to stick to. If racking up quick wins appeals to you, paying off the smaller debts sooner may be your best option.


To plan debt repayments: The snowball method calculator

MoneySmart article on Debt Consolidation here

MoneySmart article on Credit Scores and Credit Repair here

MoneySmart article on Bankruptcy and Debt Agreements here

Dave Ramsay article on the Avalanche vs Snowball methods here

Snowball method calculator here snowball and avalanche calculators here