What is refinancing and when does it make sense?

Refinancing means replacing your existing debt with a new loan, typically at a lower interest rate. It makes sense when you can reduce your interest rate by 1-2% or more, reducing monthly payments or total interest paid enough to outweigh any refinancing fees. For mortgages, refinancing fees (break costs, application fees) can be several thousand dollars, so the saving needs to be substantial. For credit cards and personal loans, transferring to a 0% balance transfer card can save significant interest but watch for annual fees and the revert rate after the promotional period.

How do I prioritise multiple debts?

First, identify all debts and their interest rates. Second, make a list of debts with interest rates above 10% (these should be prioritised). Third, ensure you have a small emergency fund ($1,000-2,000) to avoid adding to debt when unexpected expenses arise. Fourth, pay minimums on all debts except the priority one. Fifth, when the priority debt is cleared, roll that payment into the next. This approach is sometimes called the 'avalanche' method and minimises total interest paid while providing a clear, logical framework for decisions.

Should I use a debt management plan or negotiate directly?

Before paying a debt management company, negotiate directly with your lender. Australian banks and credit providers have hardship provisions and may offer reduced interest rates, fee waivers, or payment plans. A debt management company charges fees for a service you can do yourself with a phone call. If negotiations fail and the debt is significant, a financial counsellor (free, government-funded) can advocate on your behalf. Bankruptcy should be a last resort as it has serious long-term financial and legal consequences including impacts on future credit access and employment.

Debt Pay-off Calculator

Enter each debt with its balance, interest rate, and minimum payment, set your extra monthly payment budget. Results update instantly as you type. See how quickly you can become debt-free using the avalanche method.

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Avalanche targets highest interest rate first. Snowball targets smallest balance first.

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Frequently Asked Questions

Should I pay off debt or invest?

The decision between paying off debt or investing depends on the interest rate of your debt versus your expected after-tax investment return. A credit card at 19% p.a. costs more than most investment returns can reliably guarantee, so paying it off first is effectively a risk-free 19% return. A mortgage at 6% is more nuanced: after tax deductions, the effective cost might be around 4.5%, and a diversified portfolio might average 7% pre-tax, making investing alongside mortgage repayment reasonable for some people.

What is the debt avalanche method?

The debt avalanche method targets your highest-interest debt first while making minimum payments on all other debts. Once the highest-interest debt is fully paid off, you roll that entire payment into the next highest-interest debt, creating an accelerating payoff snowball. This mathematically minimises the total interest you pay over time and is generally the fastest way to become debt-free when interest rates vary across your debts.

What is the debt snowball method?

The debt snowball method targets your smallest balance first while making minimum payments on all other debts. The psychological win of eliminating a debt relatively quickly provides motivation to stay committed to your payoff plan. While total interest paid with the snowball method is higher than the avalanche approach, behavioural consistency often leads to faster actual debt elimination, particularly for people who have struggled with debt in the past and need early wins to maintain momentum.

The Total Money Makeover the total money makeover by dave ramsey builds on this approach, giving a full step-by-step plan for getting out of debt.

Is it worth consolidating my debt?

Debt consolidation can help by simplifying multiple payments into one and potentially lowering your weighted average interest rate. A balance transfer to a 0% p.a. credit card (common in Australia with 12-24 month promotional periods) can save significant interest if you can pay off the balance before the revert rate applies. However, consolidation only works if you address the underlying spending habits that created the debt, otherwise you risk accumulating new debt on top of the consolidated loan.

What is a hardship arrangement?

If you cannot meet your debt repayments, contact your lender as soon as possible. Australian banks and credit providers have formal hardship provisions under the National Credit Code and may offer a temporary reduction in payments, interest rate reduction, or payment pause for an agreed period. A hardship arrangement is recorded on your credit file and may affect your credit rating, but it is far better than defaulting. Financial counsellors (free through Services Australia) can help negotiate on your behalf.

How does debt affect my credit score?

Several factors related to debt impact your credit score in Australia: high debt levels relative to your available credit limits (called credit utilisation), missed or late payments, defaulting on any debt, and having too many credit applications in a short period (each enquiry is recorded). Your credit file in Australia can be accessed through Equifax, Experian, or Illion. Maintaining credit utilisation below 30% and making all payments on time are the most effective ways to protect and improve your credit score.