Debt Debate: What Should You Pay Off First?

Canadian household debt was already hovering around dangerously high levels before the COVID-19 pandemic. Soaring housing prices and a high cost of living has burdened citizens with debt since the 2007-2008 financial crisis. Household debt to Gross Domestic Product stood at 110% in Q3 2020 – up 16.6 points over the past decade.

Debt grew an average of 80% faster than GDP for 20 years.

Instead of fretting over the present, Canadians may want to start prepping for the future. However, what debt should you look to service first? There are typically two school of thought on this matter.

Pay down high-interest debt first

For many debtors, the most practical solution is to pay down debt with the highest interest. For Canadians, that tends to be credit cards or potentially high-interest loans from alternative lenders. Paying off this debt quickly will save you interest over the long haul. Better yet, you will progressively free up more cash to service your remaining debt.

The alternative: Pay out smallest debts

Paying off small debts is also a solid path forward. This can push you to accomplish your debt service goals faster and move on to larger debts.

Unfortunately, if your larger debts have high interest this strategy can hold you back over the long term. Every debtor’s situation is different, which is why you should consider both strategies and often opt for a balanced approach.