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Which Debt to Pay First: A Practical Order for Australians

Householder sorting priority bills before card debt

Keep the debts that can cost you your home, your car or your power connection current first. Then put every spare dollar on the debt with the highest interest rate, which is usually a credit card. Pay the minimum on everything else. The mortgage versus car loan question comes after that, and the answer depends on rates, fees and what you would do with the money otherwise.

This guide gives you the order, a worked example with numbers, and the situations where the standard order bends.

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TL;DR

  • Pay priority debts first: mortgage or rent, council rates, utilities and a car you need for work. Missing these causes the biggest problems.
  • Next, target the highest-rate unsecured debt, usually a credit card, while paying minimums on the rest.
  • Choose avalanche (highest rate first) to save the most interest, or snowball (smallest balance first) if motivation is your risk. The best method is the one you stick to.
  • Mortgage or car loan: compare rates, fees and whether you can use an offset account before you decide.
  • If you cannot keep up, call the National Debt Helpline on 1800 007 007 before you miss payments, not after.

Table of Contents

Start with what you owe

You cannot rank debts you have not listed. Moneysmart suggests writing down each debt with its balance, current interest rate, fees (including any penalty for paying a loan off early) and remaining term. Include unpaid bills and buy now pay later balances, not just loans and cards.

A simple table is enough:

Debt Balance Rate Minimum Early payout fee? Secured?
Home loan Yes, your home
Car loan Often yes, the car
Credit card No
Buy now pay later No
Tax or utility arrears No, but serious

The last two columns matter most. Rate tells you what a debt costs. Secured status tells you what a missed payment risks.

Step one: protect the debts that can hurt you most

Interest rate is not the first test. Consequence is. Moneysmart lists the higher priorities as rent or mortgage payments, council rates and body corporate fees, electricity, gas, water and phone, and car repayments if you rely on your car for work or essential travel.

The reasoning is about what you lose. Falling behind on a secured loan puts the asset at risk. A missed credit card payment usually brings late fees and a damaged credit file, which is bad but does not put you out of your home.

So a household with a 22% credit card and a 6% mortgage still pays the mortgage on time every month. It simply directs any extra cash to the card.

If you are managing the affairs of someone who has died, bills and funeral costs raise their own questions. This explainer on estate bank accounts and funeral funds before probate covers what is possible while an estate is still being sorted.

Step one: protect the debts that can hurt you most — overview diagram

If you cannot pay a priority bill

Contact the provider early. Moneysmart’s advice is to ask for an extension or instalment plan if you cannot pay on time. The RBA’s March 2026 Financial Stability Review estimated that about 1% of variable-rate owner-occupier borrowers had a cash flow shortfall at the end of 2025. Most borrowers are coping, but if you are in that 1%, lenders have hardship processes and they work best when you ask before you default.

Step two: go after the most expensive unsecured debt

Once priority payments are safe, the maths takes over. Credit cards are normally the target. Moneysmart reports, citing RBA data, that Australians owe around $33 billion on credit cards, and the average interest rate is over 18%. Compare that with a typical home loan rate and you can see why a card balance is expensive to carry.

A worked example

These numbers are hypothetical, to show the mechanics.

Say you have $8,000 on a card at 20%, a $15,000 car loan at 9%, and a $400,000 mortgage at 6%. You have $500 a month spare above all minimums.

  • Interest on the card runs at roughly $1,600 a year at the start.
  • Interest on the car loan is roughly $1,350 a year.
  • Interest on the mortgage is roughly $24,000 a year, but that is on 50 times the balance.

Per dollar, the card costs 20 cents a year, the car loan 9 cents and the mortgage 6 cents. Every $1 you put on the card saves more than putting it anywhere else. Clearing the card in about 17 months with $500 a month saves far more than the same cash on the mortgage would over that period. Then roll the freed-up $500, plus the old card minimum, onto the car loan.

The fine print: check your card is not on an interest-free or balance transfer promotional rate, and whether a cheaper personal loan or a 0% balance transfer would cut the rate. Those can help, but only if you stop adding new spending to the card, and balance transfer offers usually carry a fee and revert to a high rate after the promotional period.

A worked example — overview diagram

Avalanche or snowball

There are two well-known ways to order the rest.

Method Order Best for Trade-off
Avalanche Highest interest rate first Saving the most money Slow first win if the top-rate debt is large
Snowball Smallest balance first People who need quick wins Costs more interest overall

Moneysmart describes both and notes the key point: pick the one you can keep doing. Giving up halfway is the costliest outcome. If two debts have similar rates, a snowball approach costs you almost nothing extra and gives you momentum.

Mortgage or car loan first?

This is the question behind many searches, and the honest answer is “it depends on four things”.

  1. Interest rate. Car loans and personal loans typically carry higher rates than a home loan, so extra repayments on the car loan usually save more per dollar.
  2. Fees and flexibility. Check for early payout charges on a fixed-rate loan. Moneysmart’s checklist includes penalties for paying a loan off early for this reason.
  3. Security and need. If you need the car to get to work, keep its repayments current as a priority debt. If you could manage without it, it sits lower.
  4. Access to the money. Extra mortgage repayments may be redrawable, and money in an offset account lowers the interest charged while staying available. Money used to clear a car loan is gone.

A sensible default for many households: clear the card, then the car loan, while paying the mortgage on schedule, then direct surplus to the mortgage or an offset account. Exceptions exist. A low-rate novated or secured car loan might cost less than your mortgage, in which case the order flips. The rate on each debt is the deciding fact, so check it.

If an offset account is part of your plan, our guide on modelling mortgage offset strategies in a spreadsheet shows how the numbers work.

Why the mortgage still deserves attention

Card debt is the loudest problem, but housing is the biggest one. The ABS reports that total household liabilities reached $3,401.6 billion in the December 2025 quarter, with long-term housing loans making up $3,191.0 billion of that. For most households the mortgage is the long game. Once the expensive small debts are gone, the mortgage is where the freed-up cash flow can do the most.

And for people closer to retirement, the question becomes how long to carry that loan. We cover that trade-off in mortgage in retirement: three paths to model.

What about using your super to clear debt?

Generally, no. Super is locked away until you meet a condition of release, and early access is tightly restricted. Services Australia lists the limited cases, such as severe financial hardship, a terminal illness or temporary incapacity. The ATO notes that it cannot change the conditions under which you can access super early.

Even if you qualify, you give up decades of compounding. Treat early release as a last resort after payment plans, lender hardship help and savings. Our article on Australia’s $10,000 hardship limit and its catch explains what that process looks like in practice.

Perspective: the order is a modelling problem

At AeroWealth we build retirement models for Australians, and debt order shows up in nearly every plan. A mortgage, a car loan and a card are not separate decisions. They all pull from the same cash flow, and the money you free up goes either to super, to an offset account or to an investment.

What we see is that people compare “pay off the mortgage” with “do nothing” and miss the middle options. A better question is what each extra dollar does under each choice, and how the answer changes if rates move or income drops. That is why we built side-by-side scenarios and stress tests. You can run “card first, then car, then offset” against “all extra to the mortgage” and see the effect on net worth and retirement age, instead of guessing.

Our view is simple. Protect priority payments, remove high-rate debt quickly, then let a model, not a hunch, decide where surplus cash goes. Debt recycling is one advanced option for investors, and it only suits people whose high-interest debt and cash buffer are already sorted, as we explain in modelling debt recycling over seven years.

— Aerowealth Team

See the effect before you commit

If you want to see how clearing a card or car loan changes your mortgage-free date and retirement timeline, you can build the scenarios in AeroWealth. There is a free plan, and Pro is $7 per month for expanded scenario planning and advanced mortgage features. Details are on the pricing page.

When the standard order does not apply

  • You are behind on several things at once. Priority and consequence outrank interest rate. Contact lenders and the National Debt Helpline first.
  • You have a hardship arrangement. Follow it. Do not overpay one debt at the expense of the plan.
  • You have no emergency buffer. Without any savings, the next surprise bill lands on the card again. A small buffer can be worth building before you chase the last dollar of debt.
  • Fixed-rate loans. Extra repayments may be capped or penalised. Check before sending a lump sum.
  • Tax-deductible debt. An investment loan is treated differently from personal debt, and the right order depends on your tax position. A registered tax agent can advise you on that.

Getting help

If debts are outpacing your income, you do not need to solve it alone. The National Debt Helpline offers free, confidential and independent financial counselling on 1800 007 007, weekdays 9:30 am to 4:30 pm. A counsellor can help you rank your debts and talk to lenders. Moneysmart also points to the helpline for a step-by-step prioritising guide.

FAQ

Should I pay off my credit card or mortgage first?

The credit card, in most cases, as long as your mortgage repayments stay current. Card rates are usually far higher than home loan rates, so each dollar on the card saves more. Never skip a mortgage payment to pay a card, because the home is the secured asset.

Is the car loan or the mortgage the better one to pay off first?

Compare the interest rates and check for early payout fees. A car loan commonly has the higher rate, so it often comes first. If you need the car for work, keep its repayments up regardless, and remember an offset account can reduce mortgage interest while keeping your cash accessible.

Should I use the avalanche or the snowball method?

Avalanche saves the most interest, while snowball gives faster wins by clearing small balances first. Moneysmart says to choose the approach you will keep following. If rates are close, the difference in cost is small.

Can I use my super to pay off debt?

Only in tightly limited cases, such as severe financial hardship, and your application must meet strict rules. Super is a retirement resource, not a debt tool. Speak to the National Debt Helpline about other options first.

Sources

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