Step 1: List what you owe
Write down each debt with its balance, interest rate and minimum payments. For example:
| Debt | Balance | Interest rate | Minimum a month |
|---|---|---|---|
| Credit card | $6,000 | 22% | $180 |
| Car loan | $9,000 | 8% | $280 |
| Personal loan | $2,000 | 10% | $90 |
That’s $550 a month of minimums. Say you can pay $200 more, $750 a month in all. Card minimums are usually 2.5% to 3% of the balance (5% in Quebec), so paying only the minimum on a card can take years.
Step 2: Pick a method
Both methods pay the minimum on everything and put the extra on one debt. When it’s paid off, its payment rolls onto the next.
- Avalanche: the highest interest rate first (here, the credit card). It costs the least.
- Snowball: the smallest balance first (here, the personal loan). You clear a debt sooner, which keeps many people going.
Worked out month by month, as in our debt payoff calculator.
The difference between the two methods is small here. What matters most is paying more than the minimums, and keeping at it. Try your own debts in the debt payoff calculator.
Step 3: Pay less interest
- A low-rate balance transfer moves card debt to a card with a promotional rate, often 0% for 9 to 12 months, for a fee of 1% to 3% of the amount. Pay it off before the rate ends.
- A consolidation loan or line of credit at a lower rate can replace several payments with one. It only helps if you don’t run the cards up again. Think twice before moving card debt onto a home equity line of credit: it puts your home on the line.
- Ask your lender for help: many will lower payments for a while if you’re struggling.
Step 4: Find more to pay
- Make a budget and give the extra a fixed amount each month. The budget calculator shows where your money goes.
- Put windfalls on the debt: tax refunds, bonuses and gifts.
- Stop adding to it: take the card out of your phone’s wallet, and pay by debit card while you clear it.
Step 5: Stay out of debt
Once a debt is gone, keep paying the same amount into savings. An emergency fund means the next surprise bill doesn’t go back on a card. If you can’t keep up with your payments, get free help early: see help with debt.