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June 13, 2026 — 5:01am
I received a reader question during the week worth a whole column. It read: “I have a terrible credit card with a debt from a holiday I foolishly put on it a couple of years ago. I also have a personal loan, for my car, and a mortgage that’s far bigger than I would like. I’m a bit overwhelmed – where do I start trying to pay off my debts? And how will I ever begin to get ahead when I feel so behind?”
The question may well speak to you, too. Indeed, to many people. The answer goes like this.
The mathematical winner. The various amounts of your debt don’t factor into which one you should prioritise as much as the interest rates on them. Personal finance wisdom has long held that you should attack your debts in interest rate order, from the highest rate to the lowest.
This would usually make it a pretty clear-cut proposition: priorities one, two and three are your credit card/s, at a typical 18 per cent, your personal loan/s at perhaps 11 per cent, and then your mortgage at, say, 6.5 per cent.
Looking at that another way: you repay those debts, you save interest at that rate. And that’s what makes it mathematically smarter to repay debt than even to invest. You effectively earn a return equal to your interest rate. But that return is both risk-free and tax-free.
And that adds another level of advantage – in fact, for a higher-rate taxpayer (45 per cent) to come out ahead with saving or investing, they would need to make a before-tax return of nearly 12 per cent. That is incredibly high and incredibly unlikely year after year.
But the smartest money move is to pay down debts and invest at the same time. By repaying debt, you are simply getting out of the red; when you save and invest, you are building beautifully into the black.
You have more and more to show for the latter as time goes by. And saving and investing is how you get compounding working for you (earning it) not against you (paying it). But we are talking debt already accrued, so let’s get back to the way clear.
There’s potentially a better technique than the one I’ve described above.
The psychological winner. It could just seem like a hard slog paying off the credit card first, particularly if it’s a large debt.
The thing is that a credit card is the only debt where you don’t have a prescribed time to ditch it (don’t get me started on that). That means you can keep it ticking over with a minimum repayment, usually as low as $20 or 2 per cent. It may be most motivating for you to seek fast debt-reduction victories. Those more frequent successes – and serotonin hits – might solidify your purpose.
If this is the case, think about attacking your smallest debt first because it will take the least amount of money to repay. That could be various credit cards or personal loans, while you simply keep servicing the rest at minimum. It’s an individual call.
But if you overlay this debt decision with the smartest strategy, you will get there fast faster, easier and cheaper.
The tactical winner. Coming back to credit cards – these should not have the highest interest rate at all. If you have a card debt, consider taking up a 0 per cent balance transfer offer.
These let you do just that: transfer your balance to a new institution and pay no interest on it whatsoever. It’s a way to lure you across.
Currently, there are offers for up to 26 months, which gives you a fabulous window of opportunity to repay it “free”. If you simply divide your debt by the number of interest-free months, tip that amount onto the credit card in each of those months.
The sting in the tail of these cards is that the “revert” interest at the end of the interest-free period will be eye-watering, and so, too, will be the interest rate charged on any new purchases. So don’t keep the card if you start paying interest. And don’t use it.
Of course, you should also be paying the absolute lowest interest you can on your other debts. Let’s say you go from a 7 per cent to 6 per cent rate on a now pretty typical $700,000 home loan. Your monthly repayments will fall from $4947 to $4510, or by $437.
Which brings me to the genius strategy to ditch any debt, but one that is especially a large mortgage.
Simply keep your repayments at their existing level – costing you no more than you’re used to paying – and you will clear your home loan $265,045 cheaper and almost four years earlier.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at nicolessmartmoney.com. Follow her on Facebook, X and Instagram.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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