Debt Guides for Australians — Get Out of Debt, Consolidation and Repayment Strategies

Most Australians carry some form of debt. A mortgage, a car loan, a credit card balance, a HECS-HELP debt — often several of these simultaneously. Debt is a normal part of adult financial life. The problem isn’t debt itself: it’s expensive debt, unmanaged debt, or debt accumulated without a clear repayment plan.

Not all debt is equal. A $400,000 mortgage at 6% secured against a property growing in value is fundamentally different from a $5,000 credit card balance at 20% accumulating while you pay only the minimum. The first is a tool for building wealth; the second is a drain on it.

Managing debt well means understanding the type and cost of each debt you hold, prioritising repayment correctly, and making deliberate decisions about how to accelerate the process.

Types of Debt in Australia

Secured debt

Secured debt is backed by an asset the lender can repossess or force the sale of if you fail to repay. Because the lender has recourse to an asset, interest rates on secured debt are lower than on unsecured debt.

Home mortgages — typically the largest debt most Australians hold. Variable rates in Australia were in the range of 5.5–7.5% as of 2025. Fixed-rate periods are available but are currently priced above many variable rates.

Investment property loans — structured similarly to home mortgages. Interest on investment property loans is generally tax-deductible against rental income, which changes the effective cost.

Car loans — secured against the vehicle. Rates typically range from 6–12% depending on the lender, your credit history, and whether the vehicle is new or used. The car depreciates while you repay the loan — meaning you can end up owing more than the car is worth in the early years.

Unsecured debt

Unsecured debt has no asset backing. If you default, the lender’s recourse is legal action and debt collection — not asset seizure. Because the lender’s risk is higher, interest rates are higher.

Credit cards — the most expensive common form of unsecured debt. Standard credit card interest rates in Australia typically range from 13–25% per year. The interest-free period (typically 44–55 days) applies only if you pay the closing balance in full each month. Carrying any balance means interest accrues from the purchase date.

Personal loans — fixed-term, fixed-rate (or occasionally variable) unsecured loans. Rates range from approximately 6–20% depending on credit history and lender. Personal loans are commonly used for car purchases, home renovations, medical costs or debt consolidation.

Buy now pay later (BNPL) — technically fee-based rather than interest-based, but the late fees and implicit cost of the product function similarly to short-term credit. BNPL balances can multiply quickly if multiple plans are active simultaneously.

Payday loans — extremely expensive short-term credit, typically with annualised effective rates that can exceed 200%. Should be avoided wherever any alternative is available.

HECS-HELP: a special category

HECS-HELP (and other student loan schemes under the HELP program) is fundamentally different from commercial debt:

• It accrues at CPI (currently approximately 3–4%) rather than a commercial interest rate
• Repayments are income-contingent and collected automatically via the tax system
• It does not appear on your credit report
• It cannot lead to default or legal action
• It is written off if you die before repaying it

Because of these features, HECS-HELP is almost never a financial priority. The rare exception is when CPI is running well above expected investment returns — which has occurred briefly in some years but is not the norm over the long run.

The True Cost of High-Interest Debt

The most important thing to understand about credit card debt is how quickly minimum repayments extend the repayment period.

On a $10,000 credit card balance at 20% interest, paying only the minimum repayment (typically 2–3% of the balance) means:

• The balance barely falls month to month as interest accrues
• Full repayment can take 15–25 years
• Total interest paid can exceed the original balance

Paying a fixed $500 per month instead reduces the repayment period to approximately 25 months and cuts total interest dramatically.

The lesson: minimum repayments on high-interest debt are wealth-destroying. Even small increases in monthly payments produce disproportionately large reductions in total interest paid.

Prioritising Debt Repayment

When you have multiple debts and limited surplus income, the sequence of repayment matters. The standard framework:

Step 1 — Make minimum repayments on every debt. Missing minimum repayments on any debt damages your credit file and may trigger penalty interest rates. Never sacrifice minimum payments on one debt to overpay another.

Step 2 — Build a small emergency buffer. Before aggressively paying down debt, have at least $1,000–$2,000 in cash. Without this, any unexpected expense lands back on the credit card — undoing your progress.

Step 3 — Attack high-interest unsecured debt. Credit cards, payday loans and high-rate personal loans should be cleared before you invest or make extra mortgage repayments. A guaranteed 20% “return” from clearing a credit card beats almost any investment alternative on a risk-adjusted basis.

Step 4 — Clear other consumer debt. Personal loans and car loans at 8–15% should generally be cleared before making extra mortgage repayments, given the rate differential.

Step 5 — Mortgage and investing. Once consumer debt is cleared, the decision shifts to extra mortgage repayments vs investing — see below.

Debt Repayment Strategies

Debt avalanche (mathematically optimal)

Pay minimum repayments on all debts. Direct every dollar of surplus to the debt with the highest interest rate. Once that debt is cleared, redirect its payment plus the surplus to the next highest rate. Repeat.

The debt avalanche minimises total interest paid. It is mathematically optimal.

The downside: if your highest-rate debt also has the highest balance, you may go many months without fully clearing any individual debt. This can feel demoralising.

Debt snowball (psychologically effective)

Pay minimum repayments on all debts. Direct surplus to the debt with the smallest balance, regardless of interest rate. Once it’s cleared, redirect its payment to the next smallest balance. Repeat.

The debt snowball costs more in total interest than the avalanche. But behavioural research — including work from researchers at Harvard and Northwestern — suggests that people using the snowball method are more likely to maintain momentum and complete their debt repayment plan. Each cleared debt provides a concrete win that reinforces the behaviour.

Which to choose?

If you have strong financial discipline and can stay motivated without visible wins, use the avalanche. If you’ve tried to pay down debt before and given up, use the snowball. The strategy you stick to is always better than the theoretically optimal strategy you abandon.

A hybrid approach: if one debt has a balance small enough to clear within 1–2 months, clear it first for a quick win, then switch to the avalanche method.

Debt Consolidation in Australia

Debt consolidation means combining multiple debts into a single loan — ideally at a lower average interest rate. It simplifies repayments (one payment instead of many) and can reduce total interest.

Personal loan consolidation

Taking a personal loan to clear multiple credit cards is common. If your credit card rates are 18–22% and you qualify for a personal loan at 9–12%, consolidation can halve your interest cost.

The risk: consolidation only helps if you close the credit cards you’ve paid off and don’t re-accumulate balances. Many people consolidate, then reuse the credit cards — ending up with both the personal loan and credit card balances.

Balance transfer credit cards

Many lenders offer balance transfer deals with 0% interest for an introductory period — typically 12–36 months. If you can repay the transferred balance before the promotional period ends, you pay zero interest on it.

Key risks:

• Purchases on the new card typically attract interest at the standard rate from day one
• The 0% rate applies to the transferred balance, not new spending — many cards apply payments to the transferred balance first, meaning new spending accumulates interest until the transferred balance is fully repaid
• The revert rate after the promotional period ends is typically very high (20%+)
• Applying for a new credit card creates a hard enquiry on your credit report

Balance transfers work best for disciplined people who can reliably repay the full amount before the promotional period ends and won’t put any new spending on the card.

Mortgage consolidation (debt recycling)

Homeowners sometimes refinance their mortgage to include unsecured debt, effectively converting 20% credit card debt to 6% mortgage debt. The interest saving is real.

The risk is fundamental: unsecured debt that would have been repaid in 2–3 years is now stretched over 25 years as part of a mortgage. Total interest paid can actually be higher despite the lower rate — unless repayments on the mortgage are increased to reflect what would have been the original debt repayment amount.

Rolling personal debt into a mortgage works only if the mortgage repayments are increased (not kept the same) and the original credit facilities are closed.

Getting Help with Debt

If debt has become unmanageable — if you’re missing repayments, fielding calls from debt collectors, or unable to see a path forward — free professional help is available in Australia.

National Debt Helpline — 1800 007 007 (Monday to Friday, 9:30am–4:30pm). Free, independent financial counselling. Not a debt service company — a non-profit service funded by government grants.

ASIC MoneySmart — moneysmart.gov.au provides a directory of free and low-cost financial counselling services by postcode, as well as practical tools and calculators.

Financial counsellors are different from financial advisers. Financial counsellors help people in financial hardship navigate debt, deal with creditors and understand their options. Their service is free.

Hardship provisions — banks and other lenders are legally required to consider hardship applications from borrowers who are experiencing genuine financial difficulty. Contact your lender directly. Options may include repayment deferrals, reduced minimum payments, or fee waivers.

Debt and Your Credit File

Every missed repayment and default is recorded on your credit file and remains there for 5 years. Multiple missed repayments or defaults can significantly reduce your credit score, affecting your ability to borrow in the future — including for a home loan.

If you’re struggling, contact your lender before missing a repayment. A hardship arrangement that’s agreed in advance typically has a lesser (or no) impact on your credit file compared to an unresolved missed payment.

Frequently Asked Questions

Should I pay off debt or invest? For high-interest unsecured debt (credit cards at 15–25%), pay the debt first. For low-rate debt (mortgage at 6%), the decision is more balanced — many Australians do both simultaneously. For HECS-HELP, investing is usually the right answer given the low effective interest rate.

Does paying off my credit card improve my credit score? Yes. Reducing your credit card balance relative to your limit (lower credit utilisation) improves your score. Paying in full each month also builds a positive repayment history.

What happens if I can’t repay a debt? Depending on the debt type, consequences range from late fees and interest to default listings on your credit file, debt collection, court action, or (for secured debt) repossession of the asset. Contact your lender and the National Debt Helpline early if you’re struggling — the earlier you engage, the more options are available.

Is a debt management plan the same as bankruptcy? No. A debt management plan (informal arrangement with creditors) is not a formal insolvency event. Bankruptcy is a formal legal process with specific eligibility criteria and consequences. Most people in financial difficulty can resolve their situation before reaching bankruptcy through hardship arrangements, debt counselling or debt consolidation.

Guides in This Section

• How to Get Out of Debt in Australia
• Debt Consolidation Australia
• Debt Snowball vs Debt Avalanche

For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart. Free financial counselling is available via the National Debt Helpline: 1800 007 007.

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