Paying Off High Interest Debt in Canada: A Young Canadian's Guide

Navigating early adulthood in Canada often means facing the unexpected challenge of high-interest consumer debt. Credit cards, car loans, and payday loans can hit you like a rogue snow storm in June, disrupting your financial plans and hindering your progress. Sound familiar?

If so, you're not alone. A recent IPSOS poll showed that almost half (48%) of Canadians are stressed about being able to pay off their non-mortgage debt. This high-interest debt is a financial killer because it is way more expensive than any returns you'll see from investing. It's like paying a premium to lose.

Why This Debt is the Enemy (And How to Fight Back):

Imagine this: you're essentially paying a 20.99% annual tax on every purchase you make with a typical Canadian credit card if you carry a balance month-to-month. But here's the kicker – interest isn't just applied once a year. It's usually added monthly, which allows your debt to grow (compound) every single month, like a hidden fee that keeps getting bigger. Why would you willingly pay an extra 20.99% (divided by 12 months) for your groceries, your gas, or that new tech you wanted? It's like voluntarily shrinking your hard-earned money, month after month.

Another point to consider is that for every dollar you owe on that credit card, it's a dollar that's not growing in your TFSA. And let's be real, that 8% average market return is getting dwarfed by the massive rates the banks are charging you. Getting ahead while having bad debt is like trying to build a sandcastle while the tide's coming in, and the tide is rising every month.

So, why is this debt the enemy? Because it's a wealth-drain. It takes your money and gives you nothing of substance in return. The longer you let it linger, the more it compounds, like a hidden fee that keeps multiplying every 30 days or so. It's an unnecessary burden, and you deserve better.

All that being said, let's break down the process of paying off high interest debt in Canada!

Step 1: Face the Monster (Make a Debt Inventory):

First things first, you have to know what you're up against. Grab a pen and paper  and write down:

• Every credit card balance and the corresponding interest rate.

• Car loan details (interest rate, remaining balance).

• Any other high-interest debt (payday loans, lines of credit).

• The minimum payment for each.

Seeing it all laid out might be scary, but it's the first step to financial freedom.

Step 2: Attack Plan – How to Pay It Off The Smart Way:

• The Avalanche Method: This is mathematically THE fastest method to pay off debt. The way it works is that you will pay the minimum on everything, but throw every extra dollar at the debt with the highest interest rate (regardless of the balance/amount due itself). Once that's gone, move on to the next highest interest rate. The rationale behind this method is that attacking the highest interest rate first reduces the compounding effect of the debt, which saves you time and money over the course of your repayment. Check out the avalanche debt repayment calculator that we have created for a detailed monthly breakdown of how to pay off your debt and follow the plan to be debt free as soon as possible!

• The Snowball Method: If you need quick wins, tackle the smallest debt first. Paying off that first debt can be a psychological boost, and that momentum can keep you going on your debt-free journey. This is not the fastest payoff method, however it can be useful in the beginning stages to motivate you into not giving up.

• Debt Consolidation: Look into consolidating your high-interest debt into a lower-interest loan or line of credit. This is an effective way to reduce your interest and will save you money over time, however it comes with its own risk. If you have not fixed the BEHAVIOUR behind your spending, you might build your credit cards all the way back up and end up in a worse situation. If you want to use a consolidation method, practice budgeting and building financial discipline for a few months before you go this route to ensure that you do not fall back into old habits.

• Budgeting is Your Superpower: You can't beat debt without knowing where your money goes. Track your spending and find ways to cut back. Utilize our budget planning tool and visualizer HERE to allocate your monthly income into the categories that are necessary for survival and throw the entire leftover category into debt payoffs! Temporary sacrifices to "fun" spending (eating out, going to the movies, going to a concert) may be necessary but it will be worth it in the long-run when you are debt-free and stress-free. The more money you can save from non-necessary categories and put into debt payoffs, the faster you will pay off the debt. 

• Negotiate (Seriously!): Call your credit card company and ask for a lower interest rate or a more appropriate payment plan for your situation. You'd be surprised how often they say yes. This simple tip can save you hundreds of dollars in interest or several months in your debt payoff journey.

Getting out of debt takes time and discipline. There will be days when you want to throw in the towel, but the reward of being debt free is well worth the short-term pain you might go through. 

Pro Tips:

• Set small, achievable goals. Celebrate those wins!

• Find an accountability buddy. This is someone that can keep you on track and be there for you along the journey.

  
  

The Light at the End of the Tunnel:

Once you're debt-free, you'll feel a huge weight off your shoulders. You'll have more money to save, invest, and build your future. The sky really is the limit.

What's Next?

Ready to dive deeper? Check out our guide on budgeting and investing to learn how to make your money work for you, instead of against you.