Debt Reduction Strategies

Debt is a fact of life in Canada. If you are carrying debt, eliminating it is one of the first steps to sound financial health. This is easier said than done, as not all types of debt are easily or quickly eliminated. To successfully attack your debt, create a debt elimination plan first. Then review the debt reduction strategies below, choosing those that are appropriate for your personal circumstances.

Gain Control

1. Immediately stop taking on new unacceptable debt

If your debt is out of control, if your credit cards are maxed out or if it’s hard to make monthly payments, you should stop using credit cards. Once you have eliminated the possibility of taking on more debt, the next step is to be very careful with your credit, even if you have an immediate need. Use a debit card or chequing account instead of credit. By only spending what you have, you avoid additional debt until you are back on firmer financial ground.

2.  Be mindful and set spending limits 

  • Curtail spending to “save” money (on items you don’t need.)
  • Save ahead for “wants”
  • Live within your means
  • Don't borrow what you can't comfortably payback

Interest Reduction Strategies

3. Consolidate debt using lower interest credit

If you have a lower-interest line of credit or another credit card, transfer as much high-interest debt as possible to these products immediately. On $5,000 of debt, the difference between 28% interest and 19% interest is $450 per year. If you don’t have a lower-interest credit card or line of credit/loan available, find one. Watch out for short-term introductory offers that may expire.

4. Pay off credit balances

Whether you have major credit cards or department store cards, the best strategy is to never carry a balance over the month-end.

5. Use bank consumer loans

Banks and other traditional lenders are still our best source of funds for major purchases, such as vehicles and major appliances. Beware of the dealer or retail-offered “no interest for 36 months.” The fine print may have you ultimately paying the interest accumulation.

6. Divert all additional cash to paying off high-interest debt

Pay off the highest-interest debt first. Once it’s eliminated, move to the next highest-interest debt, paying only the minimum amount on all other debt.

7. Pay more than the minimum amount required on remaining debt when possible

Every extra dollar you pay is one less dollar to be charged interest for another month. Every dollar saved in interest can be used to fund your retirement, pay for a child’s education or pay for a vacation.

8. Make multiple, small payments throughout the month

The thought of making an extra $300 payment on your credit card debt might seem beyond reach. But if you break that down and pay $75 a week instead, you benefit three ways. 

  • Your balance declines faster, reducing your interest costs.
  • It’s less likely that you will spend your debt reduction money before your credit card due date.
  • In a five-week month, you make an extra $75 payment towards the principal.

Cash-on-Hand Strategies

9. Apply existing cash languishing in low-interest savings accounts or money market funds to pay down higher-interest rate debt. (Not your emergency fund.)

10. Making RRSP contributions usually produces a tax refund. If you use the refund to reduce your outstanding debt, you win twice: you get more money for retirement and you pay off your debt faster!

11. If you receive a bonus at work, consider putting this money (or at least a portion of it) towards debt repayment. 

Best Use-of-Money Strategies

12. Reduce expenses. Pick an expense to give up or postpone, for a period of time or to achieve a debt reduction goal. Direct the money towards debt repayment.

13. Direct monthly payments to the best possible use. If you are in a lower marginal tax bracket, it may be advantageous to forgo RRSP contributions and redirect the money towards debt repayment. Also, compare your anticipated investment rate of return to the interest rate on your debt.

14. Use one or more methods to pay off your mortgage faster.

15. If your employer offers a contribution matching savings program through payroll deduction, figure how to take advantage of it, it’s free money!

Watching your net worth increase and having your income exceed your expenses means that you’re on the right track to achieve your financial goals. All decisions to take on new debt should be considered as part of your financial plan. When deciding whether or not to buy something, compare the enjoyment factor you expect to receive against the cost plus any financing costs if you borrow money to pay for it. How many hours you will have to work, to pay it off? Is it worth it? Ask yourself.

  • How will this loan increase my net worth?
  • How will this loan increase my retirement or education savings?
  • How will this loan help me to buy a home, a car or take a vacation?


If used wisely, credit and debt can help you achieve your goals. If misused or abused, credit and debt can be the biggest obstacles a person faces in achieving their goals.

Personal Debt Consolidator Calculator

Should you consolidate your debt? This calculator is designed to help determine whether debt consolidation is right for you. Enter your credit cards, auto loans and other installment loan balances by clicking on the “Enter Data” button for each category. Then change the consolidated loan amount, term or rate to create a loan that will work within your budget. Click the “View Report” button for detailed results.

Information and interactive calculators are made available to you only as self-help tools for your independent use and are not intended to provide investment or tax advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.