How to Pay Off Debt Faster

Struggling with debt? About one-third of Canadians feel the same. But there is a way out. Read on to learn how to get out of debt, including repayment strategies, consolidation options and expert tips to take control of your finances and build a debt-free future.

Like death and taxes, some amount of debt is inevitable for most of us. But managing debt can be stressful, whether it was acquired to pay for something planned – such as with student loans or a mortgage – or to service an unexpected expense like a car repair.

To pay off debt faster, start by choosing a debt repayment plan that works for your particular circumstances. That could mean focusing on high-interest balances first, aiming for debt consolidation or exploring debt relief programs. The right strategy also depends on your income, account balances and goals. Here’s what you need to know.

Why a debt repayment plan matters

Creating a debt man­­­agement plan that fits your financial situation is crucial for taking control of your finances, especially given how profoundly debt can affect your life.

Carrying debt does much more than drain your finances: it can feel like a dark cloud, affecting your mental health, relationships and daily life. In fact, about 60 per cent of Canadians say they lose sleep over debt.

The problem is only getting worse. According to Equifax Canada, consumer debt hit $2.56 trillion at the end of 2024 – up 4.6 per cent from the previous year – with the average non-mortgage debt per consumer reaching $21,931. Consumer credit card balances climbed 7.8 per cent year-over-year through the fourth quarter of 2024, partly because many cardholders weren’t able to pay off their statements in full every month.

The benefits of a debt repayment plan include:

1. Lower interest costs

   Reducing your balance means paying less interest over time.

2. Better credit score

   A healthy credit score opens doors to home ownership, better interest rates and more credit options.

3. Peace of mind

   Facing your debt with a solid plan will help you feel more in control of your finances.

Keep reading for a step-by-step guide to paying off debt in Canada.

Step 1: Assess your current debts

Before you can tackle your debt, you need to know exactly what you owe. Break this down into two mini steps: list and prioritize.

List your debts

Create a list of all your bills, statements and balances owing. For each one, it’s important to know the total amount you owe, the interest rate, the minimum monthly payment and when it’s due.

Here’s an example of what your debt list might look like:

Total owed: $53,500

Approximate average interest rate: 13.5%

Prioritize your debt by interest rate

Now that you have all your debt laid out, arrange your list by interest rate, putting the highest first. This makes it easier to see which debts are growing fastest. Credit card interest rates typically run from 19.99 to 25.99 per cent, which is why credit cards generally come first in repayment plans.

Tip: Consider transferring your credit card balance to a lower-interest card to save money on interest charges, which could help you pay down the principal faster.

Step 2: Build a budget to free up cash flow

Once you know what you owe, it’s time to create a budget to see where your money goes and find opportunities to redirect funds toward repayment.

Need help calculating your cash flow? Try our free cash flow calculator.

Follow the 50/30/20 rule

This common rule suggests dividing your monthly income into three categories: 50 per cent for needs, 30 per cent for wants and 20 per cent for savings/debt. Here’s how it works:

• Needs: These are the necessities, such as housing, food, transportation, health care, child care and your minimum required debt payments. Allocate about 50 per cent of your income to this category.

• Wants: This category is for non-essentials. Think vacations, dining out and treating yourself. A typical budget can afford to spend about 30 per cent on these optional items.

• Savings and debt repayment: Direct the remainder of your income (about 20 per cent) toward debt payments above the minimum required amount and toward savings goals, such as an emergency fund, a home down payment or retirement.

Trim discretionary spending

To increase the amount of money allocated to debt repayment, you can look more closely at where you might reduce costs in the other two categories. First, go through your non-essential spending line by line and ask yourself whether you could find a less-expensive alternative, or if it’s really something you want to keep paying for right now. If not, consider cutting it out.

Next, review your needs category. While these are expenses you can’t eliminate, consider whether you can reduce their costs. Could you shop at a cheaper grocery store, for example, or find a less-expensive cell phone plan? Remember, mindful spending is a muscle. It strengthens the more you work it.

Redirect savings to debt repayment

When debt and interest are piling up, consider redirecting your savings toward debt repayment. Set up automatic payments to higher-interest debts instead of your general savings account (beyond your emergency cushion).

Say yes to budgeting help

Creating a budget you can stick to is essential for success. Learn more about mastering your money and tips for creating a budget that works for you.

Step 3: Create a debt repayment plan that fits your goals

This strategy depends on your personality and financial situation. Here are the most popular methods:

Debt avalanche method

Focus: Higher interest rate first.

How it works: Pay the maximum amount possible toward the debt with the highest interest rate, while making minimum payments on the rest.

Why it works: Reduces total interest paid and saves you money over time.

Who it’s best for: This method works for people who are patient and not easily discouraged by chipping away at debt more slowly.

Debt snowball method

Focus: Smallest balance first.

How it works: Pay the maximum amount possible toward your smallest debt, making minimum payments on the rest. Once it’s paid off, apply the maximum to the next-smallest debt.

Why it works: Provides quick wins and the motivation to keep going.

Who it’s best for: This strategy is ideal if you need to see immediate success to stick to your plan over the long term.

Hybrid approach

Focus: Smallest balance first.

How it works: Pay the maximum amount possible toward your smallest debt, making minimum payments on the rest. Once it’s paid off, apply the maximum to the next-smallest debt.

Why it works: Provides quick wins and the motivation to keep going.

Who it’s best for: This strategy is ideal if you need to see immediate success to stick to your plan over the long term.

Tip: Celebrate when you hit your milestones! Recognizing your progress can help motivate you to continue making positive financial choices.

Step 4: Consider debt consolidation or refinancing

Tracking multiple debts with varying due dates and interest rates requires ongoing effort. Consolidation helps by rolling everything into one loan with a single monthly payment. This helps to streamline things and might even reduce your rate, particularly on credit card debt. Let’s explore how it works.

How does debt refinancing work?

Refinancing is the process of exchanging existing debt for a new loan with better terms, such as a lower interest rate, a fixed payment schedule or simplified, single payments. If rates have fallen since you first borrowed, refinancing could lower both your monthly payment and your overall interest costs, helping you pay off debt faster.

Use our line of credit and loan calculator to determine your monthly fixed-rate loan payments.

What is debt consolidation?

Consolidating your debts is a type of refinancing. It means combining balances on multiple credit cards or loans into a single line of credit or loan at a lower interest rate. The pros? Consolidating debt can free up cash, lower your rates and simplify your payments by creating a centralized debt at one financial institution.

Canadian options for debt consolidation

Canadians have several options for consolidating debt. You might take out a personal loan or open a line of credit to pay off multiple balances at once. Homeowners can also refinance their mortgage or set up a home equity line of credit (HELOC) to access lower rates than what credit cards charge.

Risks of consolidating debt

Consolidating debt has its advantages, but it also carries risks. You might bite off more than you can chew in terms of repayment, create a longer repayment horizon or negatively affect your credit score. If you leverage your home equity, there’s also the risk of losing your home. Explore debt consolidation options to see if this path makes sense for you.

Considering debt consolidation? Use our debt consolidation calculator to see how soon you could be debt free.

How to reduce your debt

Debt relief programs help decrease what you owe or make repayment easier. Unlike consolidation, which involves repaying the entire amount, relief programs can reduce your actual debt or help during financial hardship.

Government-approved debt relief programs

Canada offers debt relief programs for specific government debts (such as federal student loans) during periods of financial hardship. If some of your debt is to the Canada Revenue Agency (CRA), penalties and interest may be waived if special circumstances apply to your situation. You can also request remission (full or partial debt relief) as a last resort when other options don’t apply.

If you have a Canada Student Loan or Canada Apprentice Loan, the Repayment Assistance Plan may reduce your payments based on your income. Borrowers with disabilities may be eligible for additional support through specialized programs.

Homeowners can refinance their mortgage or set up a HELOC to access lower rates than what credit cards charge. In Canada, home loan refinancing rules typically allow you to borrow up to 80 per cent of your home’s value minus what you owe on your mortgage.

Debt repayment plan: 5 steps to take control of your finances

Ready to tackle your debt? Here’s your five-step debt repayment plan checklist:

Step 1: Organize
Gather all your bills, statements and balances. Know the total amount of money you owe, as well as interest rates and minimum monthly payments.

Step 2: Set your budget
Review your monthly income and expenses to determine how much you can allocate toward debt repayment.

Step 3: Reduce expenses where possible
Consider ways to lower costs such as shopping at a different grocery store, choosing more-affordable food brands, opting for public transit or carpooling, moving to a more-affordable area or getting a roommate.

Step 4: Consider a debt consolidation loan
When you consolidate your debts, you can take out a single loan and start making just one monthly payment. This can be a great way to simplify and even lower your total costs.

Step 5: Stick to the plan
Lifestyle changes and financial sacrifices may be necessary to conquer your debt – stay committed to the plan.

Additional Canadian resources for debt management

Debt can sometimes feel insurmountable. But you don’t have to do this alone. Take advantage of resources like credit counselling services and financial literacy programs.

Credit counselling services

• Credit Counselling Canada
  A non-profit service with objective, accredited professionals who help with your best interests in mind.

• Canadian Association for Financial Empowerment
  A collective of not-for-profit accredited agencies that can assist you with financial literacy and help you dig yourself out of debt.

Financial literacy programs

• The Financial Consumer Agency of Canada offers tools and information to help Canadians make informed financial decisions. Their debt management resources include calculators, guides and tips for staying on top of your finances.

• Managing debt – Canada.ca
  This site can teach you the fundamentals of understanding your debt, preventing future debt and what to do when dealing with debt collectors.

RBC is here to help, too. Ready to take control of your debt? Book a check-in appointment with an RBC advisor to discuss a personalized repayment plan that works for you.