3 Proven Ways to Pay Down Debt

Craig Sebastiano
by Craig Sebastiano November 1, 2018 / No Comments

Canadians have a love affair with debt. In fact, the Bank of Canada says households have more than $2 trillion of debt. And earlier this month, Equifax said the average Canadian consumer has $23,271 in non-mortgage debt. If you want to get your debt load under control, there are three ways to get it paid off.

One popular strategy is known as the debt snowball method. You make all your minimum payments and put any additional money towards the debt with the smallest balance. Once the first debt is paid off, the additional money should go towards the debt with the next smallest balance and so on.

If you have a $1,500 line of credit with an interest rate of 7.9%, a $6,500 credit card balance with a rate of 19.9%, a $7,500 RRSP loan with a rate of 4.2%, $9,000 personal loan with a rate of 6%, the line of credit should be paid off first.

We’ll assume you currently make monthly payments of $50 on the line of credit, $100 on the credit card, $200 on the personal loan, and $200 on the RRSP loan. That’s a total of $550 a month. If you can afford to put $1,000 towards your debt every month, you should direct the remaining $450 to your line of credit—or a total of $500 a month.

Type of debt Monthly payment First additional payment
Line of credit $50 $450
Credit card $100 $0
RRSP loan $200 $0
Personal loan $200 $0

In a little more than three months, your line of credit will be paid off and you should put the $500 towards your credit card on top of the $100 you’re already paying. Once the credit card bill is paid off, you should pay off the RRSP loan and then the personal loan.

The other well-known strategy is the debt avalanche method. You make all your minimum payments and put any additional money towards the most expensive debt first. When the first debt is paid off, the additional money should go towards the debt with the next highest rate of interest.

This time, you’ll put the additional $450 towards your credit card bill for a total payment of $550 a month.

Type of debt Monthly payment First additional payment
Line of credit $50 $0
Credit card $100 $450
RRSP loan $200 $0
Personal loan $200 $0

It will take you about 14 months to pay off the credit card bill because you’ll also have to pay $795.40 in interest over that period of time. Once your credit card bill is paid off, you can put the additional money towards your line of credit. Once that’s paid down, you will pay off the personal loan and then the RRSP loan.

This method will save you the most amount of interest, but it might not be the right strategy. Studies have shown participants who focus on paying off the smallest balance first are more likely to be successful versus those who focus on the debt with the highest interest rate.

In the example above, if you pay off the line of credit first, you achieve your first accomplishment in a little more than three months and are more motivated. If you pay off the credit card balance first, it will take more than a year to accomplish your first goal.

The final strategy is called the debt lasso method. It involves trying to reduce the amount of interest on all of your debt. You can contact your lenders and ask them to lower the interest rate.

If that doesn’t work, you can try to find another lender who can offer you a better rate on a line of credit to consolidate some or all of your debt. A home equity line of credit is another option. You can also move your credit card debt to a balance transfer credit card, which will give you a great low interest rate for a short period of time.

However, you don’t want to make the situation worse after you consolidate your debt. If you have a lot of consumer debt, you likely overspend and need to acknowledge that you have a problem. If you don’t change your spending habits, you’ll likely go deeper into debt.

The bottom line

Paying off debt is necessary if you want to get ahead. Choose a strategy that works for you in order to get your debt paid off as quickly as possible.

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