What’s the best way to pay down debt?

Many Canadians have debt of different amounts and for many different reasons. Common types of debts can include car loans, credit card debt, lines of credit and personal loans, and mortgages. 

Canadian consumer debt reached $2.54 trillion in the third quarter (Q3) of 2024, according to credit bureau Equifax Canada. That’s a 4% increase from the same period last year, with non-mortgage debt up 3.8% from Q3 2023. The average consumer debt is $21,810, up $796 from the year before. Overall credit card debt continued to rise in 2024 (up 9.4% over 2023), partly due to population growth and partly because Canadians are carrying a higher average balance. 

The reality is that a lot of Canadians are struggling financially. A recent survey by insolvency trustee Harris & Partners shows that 57% of those who responded said their income is not enough to cover basics like rent, food, and utilities. Many Canadians are therefore increasingly relying on credit cards, other kinds of consumer credit, and support from family to make ends meet.

There are a few common debt repayment strategies, and which one to choose depends mostly on your personality. Consider your unique situation and money challenges and patterns to help you determine which solution might be the best for you. Here are 4 to consider.

The debt snowball method

If you are motivated by accomplishments, then you might like the “debt snowball” strategy. Using this approach, you continue to make just your minimum payments on all outstanding debts and then use any surplus money to pay off the debt with the smallest dollar value first (regardless of interest rate). For example, let’s say you focus on paying off a $3,500 personal loan with an 8% interest rate. It might not be your biggest debt or your highest-interest debt, but you can feel good about paying it off. Then you tackle your next smallest debt amount—say, a $11,000 credit card balance with a 21% interest rate—and start the process again until all outstanding debts have been repaid.

The debt avalanche method

Maybe you’re more motivated by saving on the interest you’re paying. In that case, you would use the “debt avalanche” strategy, where you pay the minimums on all debt but pay any surplus money each month to the highest-interest rate debt first—regardless of the debt amount. In the above example, that would be the $11,000 credit card debt with an interest rate of 21%. Once you’ve paid that off in full, then you pay off the next highest-rate debt (the $3,500 personal loan at 8%), and so on, until all of your debt is paid off. 

Each strategy to pay down debt has its own good points. For instance, the debt avalanche strategy saves you more money in interest costs, while the debt snowball approach may keep you more motivated based on the quicker, small successes along the way. Setting timeline goals, which detail exactly how long you will take to pay off each debt, will help to keep you focused so you keep pursuing your goals. Ensure you continue to pay the minimum balances on all debts so they won’t reduce your credit score, incur more interest, or (worst case) lead to the cancellation of your credit cards.

Balance transfer to a lower-interest credit card

Another solution, if you qualify, is that you may be able to transfer some or all of your credit card balance to a new lower-interest credit card (sometimes zero interest, if you have a really good score). This still requires consistent, on-time payments, but you will accumulate less interest.

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Some credit card rates are special “promo” rates only offered for a limited time, typically 6 or 12 months after you sign up. At the end of the special offer period, the rates will return to the regular higher rates—check the fine print to find out how much. While you have the lower rates, though, you won’t incur much (if any) new interest, so your payments will be directed to the principal. This helps to decrease the balance at a quicker pace than if you were also paying interest.

You may be able to consolidate several smaller-balance cards with this promo offer and then make just one monthly payment. But take note: this strategy takes discipline! Make sure you focus on paying as much down as you can during the promo period and avoid creating new debt.

Debt consolidation loans

If you prefer a more structured system to pay down debt, maybe a debt consolidation loan would work best. It gives you a fixed interest rate and a fixed payment amount—usually paid every month—over a fixed period of time. This may allow for better cash flow planning because you will know exactly what amount your debt payment will be each and every month for a very specific period of time. 

Above all, think about how great it will feel when your debt is repaid and eliminated. Keep this top of mind as you move forward to zero debt and, eventually, a longer-term savings plan.

Each strategy to pay down debt has its own good points. For instance, the debt avalanche strategy saves you more money in interest costs, while the debt snowball approach may keep you more motivated based on the quicker, small successes along the way. Setting timeline goals, which detail exactly how long you will take to pay off each debt, will help to keep you focused so you keep pursuing your goals.

More about debt management:

• The MoneySense guide to debt management: How to get out of debt
• How AI is helping Canadians budget, save, and tackle debt
• Managing debt to build wealth
• How to consolidate debt in Canada

About Janet Gray

A Certified Financial Planner with over 20 years of experience, Janet is an advice-only planner with Money Coaches Canada since 2014. She is regularly featured on CBC, Globe and Mail, Toronto Star, and more.

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