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Strategies for Paying Down Debt

By Diane Amato

Published July 20, 2023 • 5 Min Read

For most individuals, a certain amount of debt is inevitable. But there’s helpful debt, like taking advantage of low interest rates to finance a home or education, and the kind of debt that causes stress — like unexpected debt or debt that worsens over time.

Whatever the reason for your debts, there are ways to pay them down. It’s important, however, to consider your financial situation and find a strategy that works for you.

Start by knowing how much debt you’re working with

Knowing how much debt you have overall can be a good first step. Make a list of all your current debts — from credit cards and student loans to home and auto loans. Include the interest rates for each and how much your minimum payments are. Then look at your budget to see how much you can comfortably put toward paying off your debts. Once you have a full picture, you can decide on a strategy for paying them down.

Want help creating a budget? Try our online budget calculator.

Strategies for paying down debt

1. The avalanche method (a.k.a. debt stacking)

The avalanche strategy pays off debts with the highest interest rates first. that’s because the longer you take to pay a high-interest-rate loan, the more you’ll pay over the loan’s lifetime. Ending loans with high-interest rates saves you more money over time.

Based on your budget:

  • Rank your loans by their interest rates

  • Pay the most you can comfortably afford on the debt with the highest interest rate

  • Make the minimum payments on your other debts

  • Once the loan with the highest interest is paid off, start paying down the next loan with the highest interest rate

  • Keep working through your list until all your debts have been repaid

You should start to see more cash free up as you pay off your high-interest-rate loans.

2. The snowball method

This one works in reverse to the avalanche method. Instead of paying off the debts with the highest interest rates, you focus on your smallest loans and pay them off first. These early “wins” can help lift some of the financial stress you’ve been feeling and motivate you to keep going.

  • Order your debts by their amounts

  • Based on your budget, direct the most money towards your smallest debt to pay it off soonest

  • At the same time, make the minimum payments on your other debts

  • After you’ve paid off the first debt, put that money — plus the minimum payment — toward your next largest debt

  • Keep working through your list

This way, your payments “snowball” as you work through your list. The amount of cash from the previous loan is now added to the next one, helping you pay it off faster.

3. Lower interest

The interest on a loan is what it costs to borrow money. Rates are calculated based on several factors, but the biggest one is the amount of money you borrow. Over time, interest on your debts can add up, so lowering the interest you’re paying can help you pay down your debt faster.

Here are a few ways to lower the amount of interest you’re paying:

1. Pay more than the minimum: Paying more than the minimum each month can reduce the principal balance faster — which reduces the total interest you pay over the life of the loan. Even paying a little more than the minimum amount can help over time.

2. Consolidate high-interest debts: A debt-consolidation loan may lower the overall interest you’re paying. One loan, instead of multiple loans, may also help you stay on top of payments by simplifying your debt payments. If you have multiple high-interest debts, such as credit card debt, it might be worth consolidating them.

3. Refinance your loans: For loans like mortgages, you may be eligible to refinance and replace them with one with a lower interest rate. If interest rates have decreased since you took out a loan, it might be a good time to refinance. Be sure to compare terms from different lenders and calculate the potential savings before deciding.

4. Explore balance transfer options: If you have credit card debt, consider transferring the balance to a card with a lower or zero per cent introductory interest rate. The lower rate may help you pay down debt faster.

5. Talk to a professional: A credit counsellor or financial advisor can guide your debt management strategies, negotiate with creditors on your behalf, and help you create a personalized plan to reduce the interest you’re paying.

Remember, whether you’re facing some challenges or feel you’re in good financial shape, it’s important to have a strategy for reducing debt. Take an in-depth look at your individual situation, and consider the potential costs and benefits of each option before making any decisions.

Our credit specialists will help you select the credit solution that is right for you, or visit an RBC branch near you: Find a Branch.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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