5 Steps To Addressing Debt

More than 1.2 million Canadian households will face mortgage renewals this year¹, and many of them will be renewing at a higher rate than they’re paying now. Consumer debt in Canada also hit a historic high in February 2025, driven by more Canadians carrying debt than before, with the list of in-debt Canadians expanding to include younger Canadians (Gen Z)². Credit card debt also hit a new high in Canada this year. Needless to say, debt is impacting many Canadians today. 

Some debt holders may have felt some relief when the Bank of Canada began a rate-cutting cycle in June 2024, which lasted for seven consecutive rate reductions, including a jumbo3 cut in December. While rate reductions can lead to financial relief, Canadians still rank money as their number one source of stress, causing more stress than work, relationships or health4. And while different types of debt impact Canadians differently, there are some tried and true strategies that those looking to pay down their debt can employ.  

1. Determine If Debt Is Good Or Bad 

Not all debt is created equal. The money you borrow to improve your future, for example through education or investment, could be good. Good debt typically includes student loans, mortgages, investment loans and some business loans. Good debt is usually interest-free, low interest, or the interest is tax-deductible. For these reasons paying it off might not be a priority, or even a good financial decision. If you have other financial goals that will get you further ahead, you might want to defer repayment. Some examples include continuing education that will help you earn more income later, borrowing to invest at a higher rate of return than the interest rate on the debt (adjusted for risk and taxes) or buying another income-producing property.  

Bad debt on the other hand, typically doesn’t improve your financial situation; it will often worsen it. Bad debt is often incurred by borrowing to spend on consumables or depreciable items or paying for access to immediate cash. Bad debt typically includes credit card debt and payday loans. Bad debt is usually high interest, could include other types of carrying costs or fees, and is not tax-deductible.  

2. Plan For Good Debt 

Even good debt needs a plan, even if the plan doesn’t include paying it off right away. Most debt requires you to make regular payments to maintain the low interest rate, and to ensure there is no harm to your credit. Make sure that the regular payments you must make on good debts are accounted for in your budget. Automate them if possible.  

Plan for renewals. Mortgages and loans are sometimes offered for a period (term) that does not align with the debt’s amortization, resulting in the term ending before the debt is repaid. This will happen to over 1 million Canadians this year when their mortgage terms end before their loans are fully paid back. These Canadians must either renew their mortgage or transfer it to another lender, likely at a higher interest rate. Higher rates mean higher payments and a larger portion of a household’s budget going toward servicing those payments. Living in the same home becomes more expensive. If you can’t afford higher mortgage payments, consider refinancing (extending the amortization to lower the payments). Note, however, that this could incur other costs and fees and will extend the date at which you’ll be mortgage-free.  

3. Tackle Bad Debt 

While it’s ok to carry good debt a little longer, focus on repaying bad debt as soon as you can. If possible, pay more than the minimum payments required. In many cases, making only the minimum payments will result in carrying bad debt for decades! 

If you have liquid savings available that are earning less than the bad debt is costing you (that is likely the case), and you don’t need those savings for an emergency, or you have access to a line of credit in case of emergency, consider paying off bad debt with your savings. 

If you have cashflow available in your budget, direct it toward paying off bad debt at the highest frequency you can (bi-weekly or monthly, as you get paid). Every payment you make will reduce the interest you’re paying on the debt and leave more cash flow available the next month. 

4. Choose Your Repayment Method 

For those that have multiple debts outstanding, develop a payment strategy to determine which debts to repay first. There are a few tried and true strategies you can employ:  

With this strategy, you would rank bad debt by balance owing and pay off the debt with the smallest balance first. This results in eliminating the number of outstanding debts you have, which can help you feel organized and accomplished. Once the smallest debt is paid off, you move on to the next. 

With this strategy, you pay off the highest interest debt first. This results in you paying the least amount of interest, which will help you save money, as higher-interest debt is more expensive. Once the highest-interest debt is paid off, you move on to the next.  

This strategy incorporates the snowball and avalanche methods by repaying higher-interest debt with lower-interest debt, which also reduces the number of creditors you owe. An example would be paying off credit card debt or high-interest debt with a secured line of credit at a lower rate. Or, by rolling all outstanding debts into your mortgage when you refinance. (If you’re one of the 1.2 million Canadians renewing this year, this may be your chance!) 

5. Understand The Impact Of Your Debt Strategy On Your Overall Financial Plan 

Once you’ve established your debt repayment plan, work it into your overall financial plan.  

Debt can be stressful. With different kinds of debt impacting millions of Canadians, there are millions of personal situations and sets of circumstances that will determine what repayment method is best for each of you. And while the steps above will lead to different outcomes, they will lead you to a plan that works best for you.  

Julie Petrera, MBA, CFP, CIM is a certified financial planner.  

X: @petrerajulie