Australians are focusing on paying down debt as the rising cost of living and interest rate hikes prompt a sharp retreat from shopping centres across the nation.

But it can be difficult to work out how to prioritise different types of debt, particularly for families trying to budget for the long-term costs of a mortgage and other big debts like student loans.

These decisions often carry tax implications for many Australians too, making it even trickier.

Financial adviser and Sort Your Money founder David Rankin suggested that those trying to work out where to start paying down debt first would want to look carefully at the highest interest rates.

That could include credit card debt, which typically carries extraordinarily high interest rates, before debt like student loans (HECS).

Student loans are pegged to wages growth, not inflation.

“By prioritising the repayment of debts with the highest interest rates, you will free up proportionately more cash when these high interest facilities do eventually get paid down,” he said.

“You can then repurpose [these funds] to turbo-charge the reduction of your other debts.”

As always, you’ll want to seek independent advice about how exactly to prioritise your debt repayments, and anyone struggling with repayments should contact the National Debt helpline.

This non-profit helpline is a point of call for anyone looking for free advice and education about debt.

‘Secret killer’ debt

In general, there are a few things to keep in mind when budgeting a debt repayment timeline.

Accountant Nicole Kelly, who runs TaxTank, said people should think about managing debt into the future, not just now, which required thinking about how interest rates might change.

“Budget that into your future costs, whether it’s things like home loans changing from low fixed rates to variable rates, or if you’re a property investor being pushed from interest-only [repayments] to principal and interest repayments,” Kelly said.

The “secret killer” according to Kelly, however, is credit card debt, which in most cases should be repaid as soon as possible ahead of other debts.

“Credit cards haven’t missed the interest rate hikes either, and people are finding themselves caught out with higher repayments,” Kelly said.

The latest data from the Reserve Bank shows that the average rate of credit card balances incurring interest soared in 2023 to more than 18.3 per cent – a record level – with outstanding debts totalling more than $17 billion.

Encouragingly, however, total debt fell in May by $83.9 million, suggesting Australians are prioritising paying it down.

Other debts, such as student loans may be less expensive to keep on the books.

“Future growth in student debt is apt to be much more subdued than last year’s shock 7.1 per cent increase,” Rankin said.

“If you are focusing on the repayment of ‘expensive’ debt, therefore, from here on in, it is likely that your public student loan will no longer be the priority.”

Speed doesn’t always pay

You also need to decide how fast you can afford to pay down debt, which is an important decision because it will affect how much interest you end up paying in the longer term.

It may seem smart to try and pay down debt as soon as possible to minimise that interest, but Rankin said it’s actually more complicated than that and that speed doesn’t always pay.

“Don’t make the mistake of being a sprinter in a race of marathon runners,” Rankin said.

“You might be patting yourself on the back at first, only to realise that your higher repayments are actually taking the oxygen out of the rest of your money.

“Extra repayments, therefore, need to be affordable in the whole scheme of your finances, with consistency over time – rather than speed – being the key to success.”