Paying off debt in Canada: budget, high-rate first or low-balance first

According to FCAC, creating a budget is a key step in paying debts. A budget helps you: • identify your debts; • balance income with savings and expenses; • prioritize repayment over unnecessary spending; • track your progress. For each debt, note the total amount owed, the minimum monthly payment, and the interest rate. Compare monthly income to expenses to see how much you can put toward debt. If expenses exceed income, act early; FCAC also discusses reducing expenses. Use FCAC's Budget Planner to structure this work. The FCAC also advises checking your credit report to make sure it includes all your debts and contains no errors; you can get a free copy online.

Before choosing which debt to target first, FCAC says to consider paying off past-due accounts. Paying them quickly may limit extra charges; late payments can harm your credit score; and if accounts stay past due too long, a creditor may send them to a collector, which can lead to legal action. With either strategy afterward, keep making minimum payments on all debts.

FCAC describes two main strategies to decide which debts to pay first. Highest interest rates first (often called "avalanche"): list debts from highest rate to lowest; put extra money toward the highest-rate debt. FCAC says you will pay less interest and can become debt-free sooner. Lowest balance first (often called "snowball"): list from lowest balance to highest; put extras toward the smallest balance. You may see progress quickly and stay motivated; FCAC notes this strategy may cost more over time. Neither FCAC nor SD6 Tools claims one method is best for everyone: it depends on your goals and motivation. A schedule that is too aggressive may cause missed payments (hurting credit); one that is too long may sap motivation.

Educational illustration (hypothetical rates, balances, and payments; your agreement prevails). Two debts, fixed minimums, plus $200 extra per month. Method: each month, interest is added to the balance (balance × annual rate ÷ 12, no intermediate rounding), then the minimum is paid on each debt; the extra and the minimums of debts already paid off go to the focus debt. • Card H: $4,000 at 19.9%, minimum $120/month • Card L: $1,500 at 12%, minimum $45/month Results from our script (rounded): • highest-rate strategy (H then L): about 18 months, $723 interest; • lowest-balance strategy (L then H): about 18 months, $834 interest. In this example, time is the same, but highest-rate first saves about $111 in interest. Gaps change with different balances, rates, or minimums; this is not a prediction for your situation. To see how interest builds on a balance, also see Compound interest explained and our compound interest calculator.

FCAC advises trying to pay the full balance each month by the due date. Otherwise, interest often applies from the purchase date. If you cannot pay in full, make at least the minimum. Paying only the minimum takes longer and costs more interest; even a small increase can shorten the timeline a lot. FCAC published example (starting balance $2,000, 18% rate): • minimum only ($60/month): about 3 years 11 months, $793 interest; • minimum + $100 ($160/month): about 1 year 2 months, $231 interest. As of August 1, 2025, FCAC states that the minimum payment on credit cards for Quebec residents is 5%. Quebec's OPC notes that consumer protection law sets the minimum at least at 5% of the balance due, and that paying the full balance each month is always preferable to avoid credit charges. OPC also illustrates ($1,000 purchase at 19.9%): 100% → $0 charges; 50% → $34 over 8 months; 5% → $442 over 6 years. Use FCAC's Credit Card Payment Calculator to compare options.

FCAC says managing debt may involve contacting creditors. They may offer a lower rate, stretch payments (usually costing more interest), or consolidate debts into one loan. These are possibilities FCAC describes, not a product or institution recommendation. For family or friend loans, FCAC suggests an agreed schedule and, if useful, a written agreement. After payoff, FCAC says consider closing accounts you no longer need, while often keeping your oldest account for credit history. In Quebec, OPC also mentions consumer associations that sometimes offer free budgeting consultations.

If you can no longer make your minimum payments, other options exist, including a consumer proposal and bankruptcy. According to the Office of the Superintendent of Bankruptcy (OSB), a Licensed Insolvency Trustee (LIT) is the only professional authorized to administer these proceedings. Be wary of companies that promise to "settle" or "reduce" your debts for a fee: the FCAC and the OSB warn about these services, and only a LIT can file a consumer proposal or bankruptcy. Ask: "Are you a Licensed Insolvency Trustee?" and check their licence in the OSB registry. A consumer proposal or bankruptcy has significant consequences, including on your credit report: talk to a LIT before deciding.