Developing a debt strategy is crucial to paying off balances faster, and paying less interest. There are several debt repayment methods, and finding the right one is about knowing your options first.
When dealing with debt there are some methods to know which can help provide a repayment strategy. The average Canadian owes close to $4,000 in credit card debt according to TransUnion (2023) and the average personal debt (excluding mortgages) is approximately $21,000.
While carrying debt is common for most, it’s important that it is kept manageable. There is also the right and wrong types of debt to carry, and knowing how to pay it off.
With about 53% of Canadians living paycheque to paycheque, an unexpected expense can easily disrupt a well planned budget. It doesn’t take much. Without an emergency fund or any savings, this can make it necessary to borrow.
The rise in debt has also led to an increase in the number of insolvencies (bankruptcies and proposals) in Canada by over 70% in the 12‑month period ending March, 2023. Inflation has had an impact that is now hard to ignore, but this has also been a growing concern for years. Dealing with debt struggles has been on the rise for many.
One of your first priorities with your personal finances is to examine your situation and start taking care of any debt that you may have. Or to review what they might be and what options you may have. Sometimes an early payment can result in penalties and other times even if this is the case it can still make sense to pay off some debt early.
As you analyze your personal finances and begin to determine a strategy for managing your money and paying your debt, you’ll want to explore the many popular debt repayment methods. As you develop an understanding of the pros and cons for different options you will be able to find one that is the most appealing and probably right for you.
Debt Repayment Methods
We’ve put together a list of the different types of methods for debt repayment, but it’s up to you which is going to be the right one that is most suitable to you. Read through the entire article, even bookmark and review again, because for some this might be one of the more important things you read which could impact your own finances.
Debt Snowball method
A debt-repayment strategy that focuses on paying off your lowest balances first, to provide a sense of accomplishment as you eliminate smaller debts. We would suggest this isn’t the most effective option but know it’s appealed to some in the past.
Debt Avalanche method
This starts with ranking your debts by interest rate from highest to lowest. Dedicate any extra resources possible to the balance that has the highest interest. All other balances get the minimum payment. When the highest one is paid off, start paying off the next highest.
Debt Snowflake method
Start by paying off the smallest amount of debt first, then work your way up through paying off progressively larger debts. It’s great for people who are motivated by small wins as they watch individual debts disappear faster.
Debt Stacking method
The Debt Stacking method is where you rank your most expensive debts, the ones with the highest interest rates, first while paying the minimum on your smaller debts until the larger debt is repaid. This helps you to eliminate the debts with the most interest first, dropping extra costs to a manageable level in a fairly short amount of time.
Debt Fireball method
The debt fireball method is like a hybrid approach that combines aspects of the snowball and avalanche methods. You start by breaking up your ‘good debt’ and ‘bad debt.’ Then prioritize all of the ‘bad debt’ (which has high-interest) and use the snowball method among your ‘bad debts,’ paying them down from lowest balance to highest balance. Then work on tackling your ‘good debt’ from the lowest balance to highest balance.” This is also similar to the debt fireball is similar to the “debt avalanche” in that it focuses on high-interest debt first. Where it diverges, however, is in prioritizing savings before tackling low-interest debt.
Debt Blizzard method
You can use the Debt Blizzard method to pay off your smallest debt first, which can be a motivational boost. This might appeal to some since it’s going to provide a sense of accomplishment, but is not the most effective way of dealing with debt. It would be suggested to consider one of the other methods mentioned over using the Debt Blizzard method.
Debt Tsunami Method
The Debt Tsunami Method is a debt reduction method in which you pay off your debts in order of their emotional impact. This could be defined as financial stress or a number of different things that might weigh down on you. Everyone would have their own reasons for impact and you would have to define your own in terms of priority.
Debt Spiral Method
Rather than focusing on the highest interest rate or the smallest balance, the Debt Spiral method concentrates on a metric calculated by dividing a credit card’s (or any debt) balance by its interest rate. This is called the debt-to-interest ratio. When you rank your debts based on this ratio and pay the one with the highest ratio first, you’ll save money on interest while spreading out your wins. The Debt Spiral method won’t save you as much on interest as the Debt Avalanche method would., or a motivating win as early as you would with the Debt Snowball method but you’ll get the benefits of both by meeting somewhere in the middle.
Hybrid Debt Payoff Methods
This looks at the interest paid and prioritizes the fastest first debt payoff but also reduces the amount of interest you pay. This means that if two loans are paid off within a similar time frame, the hybrid method will prioritize the one that has a higher interest rate.
You may find other options like the Lasso Method or similar, but we’ve kept our recommendations limited to the top choices we might suggest above.
Another Debt Repayment Method
The above methods are among the most popular ways to pay off debt. In addition to these, GoodCheddar suggests there could be another option to consider as well. This is a little something that we like to call:
This is our own proposed debt repayment method. The Debt Cyclone method is where you would start with a large payment in the middle of your debt, and make minimum payments on other debt. This provides the benefit of making progress on what is owed, without focusing on the largest. At the same time, it doesn’t prioritize the smallest debt, which is less significant to pay off.
This provides a good balance of the two most popular methods, the Debt Snowball and the Debt Avalanche. Determine what you can afford to pay towards your debt, then add up all the minimum payments, excluding the middle debt one. Subtract the total of minimum payments from what you can afford and that is the sum to pay towards that middle debt payment. We call this the Debt Cyclone because it deals with the ‘eye of the storm’ since you target the middle debt first.
Depending on your situation, the Debt Cyclone might be the answer to paying down debt sooner. It’s a balance of paying off the more costly debt while feeling accomplishment sooner for paying some off entirely.
What Are Other Debt Options?
With a large increase in insolvencies being claimed, it doesn’t mean it’s a cure for debt issues. Using an insolvency to take care of your debt is a step away from bankruptcy and will be part of your credit report for 6 years or more in most cases.
If you find yourself in a situation where you might be considering these types of options, you should not come to a decision based on some articles you’ve read online and would be better off if you speak to a personal finance professional such as an advisor to learn your best options.
Should you be considering insolvency or similar, you need to educate yourself and speak with a financial advisor before making any decisions.
What About Debt Consolidation?
Another option is debt consolidation which is where you take a personal loan or installment loan to pay off debt, but this is only advisable when the interest rate is lower than the rate of the debt to be paid off with a debt consolidation loan.
Using a debt consolidation loan can be effective to get your finances under control. For some it can also have an immediate and direct impact on quality of life. With debt consolidation you can find that the personal loan lowers your monthly
In most cases it does not make sense to include a student loan within a debt consolidation plan since financial assistance like this is usually federal with a low rate. If you have taken out high interest loans in the past then debt consolidation could be a good option for getting your debt under control. Due to their high interest rates these can create a debt cycle and be troublesome to pay off.
If your credit score does not provide options where debt consolidation would be beneficial, look forward to when it might be. For the time being you can continue making your payments on time, but as your credit score improves along with your options you will eventually be eligible to borrow with better rates where debt consolidation can benefit you.