3 debt repayment strategies every Canadian should know  

No matter what stage of life you’re in, you probably have some form of debt – a student or personal loan, a credit card balance, or maybe mortgage debt. Whether you’re successfully paying this down or want to learn about ways to help get rid of your debt faster, we have three strategies for consideration.

Before starting, here are some things you should do to set yourself up for success: 

• Make a master list of all your debts. A spreadsheet is a great place to store this information. Use exact figures and include minimum monthly payments and interest rates.
  
  
• Create a budget. If you don't already have a budget, now's the time to make one. Be sure to include all your expenses, so if you occasionally enjoy going to the movies or a concert, make space in your budget for these activities.
  
  
• See what changes you can make. Take a good look at your spending habits and identify expenses you can reduce. Adjust your budget numbers as needed.
  
  
• Determine a monthly debt repayment amount. It's an easy equation: Net Income - Expenses = Money available to pay down your debt. You may or may not want to use all of it, but make sure you commit to a monthly amount.

With the debt snowball method, you'll focus on paying off your smallest debt first while making the minimum monthly payments on all your other debts. “Snowball" refers to the way the amount you have each month to pay off your smallest debt gets larger with each debt you retire.

How to implement the debt snowball method:

• Take your master list of debts and sort it according to the amount of debt, from smallest to largest. Your smallest debt will now be at the top of your list.
• The first month, make the minimum payments for each of your debts, other than your smallest debt.
• Put the rest of your monthly debt repayment amount toward this smallest debt.
• Do this each month until you've paid off your smallest debt. Then delete this debt from your list, so you can work on your next smallest debt.
• Continue with this process of paying the monthly minimums on your other debt and putting the rest of your debt repayment funds toward your smallest debt.

Let's say you've budgeted a monthly debt repayment amount of $600, and you have the following debt balances outstanding:

1. Credit card A, with a balance of $1,100 and a minimum monthly payment of $35.
2. Credit card B, with a balance of $3,000 and a minimum monthly payment of $90.
3. Student loan of $9,000, with a minimum monthly payment of $210.

With the debt snowball method, you'd pay the minimum monthly payments of $90 (credit card B) and $210 (student loan). After making these minimum payments, you'd have $300 left of the $600 you've budgeted for debt repayment. You'd put this $300 toward your smallest debt, credit card A.

You continue this process each month until you've paid off your credit card A balance. So, the next month you pay the $210 minimum monthly payment on your student loan and put the remaining amount ($390) on credit card B, which now holds the honour of being your smallest debt.

Why choose this method? With this method, it's all about the psychological effect of the small win. If frequent small wins motivate you more than a longer-haul big win, the debt snowball method could be a good choice for you.

The cons: On the downside, you won't always be tackling your highest-interest debt with this method. Which means you'll likely take longer to pay off all your debt. Plus, it'll cost you more overall.

Tip: You can speed up the snowball debt repayment strategy by enrolling in a program like Scotiabank's Bank the Rest®.

With this program, you choose to round up your debit card purchases to the next multiple of either $1 or $5. The difference between your total purchase amount and the round up amount is then automatically deposited into your Money Master savings account.

Basically Bank the Rest puts your savings on auto-pilot. And the bonus? You can use the extra amount you save each month toward paying off the smallest debt on your list or the minimum monthly payments on your other debts.

Like the debt snowball method, with the debt avalanche strategy you're consistently paying more than the minimum on one debt each month. But that's where the similarity ends. With the avalanche method, you'll focus on paying off your highest-interest debt first, while also making the minimum payments on all your other outstanding balances.

How to implement the debt avalanche method:

• Take your master list of debts and sort it according to interest rates, from highest to lowest. Your debt with the highest interest rate will now be at the top of your list.
• The first month, make the minimum payments for each of your debts, other than your highest-interest debt.
• Put the rest of your monthly debt repayment amount toward this highest-interest debt.
• Do this each month until you've paid off your debt with the highest interest. Then delete this debt from your list. The next debt will now be your highest-interest debt.
• Continue with this process of paying the monthly minimums on your other debt and putting the rest of your debt repayment funds toward the debt at the top of your list (your highest-interest debt).

Let's plug in some hypothetical numbers again: You've budgeted a monthly debt repayment amount of $600 and you have the following debt balances outstanding:

1. $3,000 balance on credit card A, with a 21% interest rate and a minimum monthly payment of $90.
2. $1,100 balance on credit card B, with a 14% interest rate and a minimum monthly payment of $35.
3. $9,000 student loan, with a 6% interest rate¹ and a minimum monthly payment of $210.

Using the debt avalanche method, you'll pay the minimum monthly payments of $35 (credit card B) and $210 (student loan). After making these payments, you'll have $355 left of the $600 you've budgeted for debt repayment. You'd put this $355 toward credit card A (your debt with the highest interest rate).

You continue this process each month until you've paid off your credit card A balance. The next month, you'll pay the $210 minimum monthly payment on your student loan and put the remaining amount ($390) on the debt that now has the highest interest rate: credit card B.

Why choose this method? With the debt avalanche method, you end up paying less interest overall than you would using the snowball method, since you're paying off your highest-interest debts first. It's a great method if your personality leans toward discipline and patience (since it does take longer to see that initial "win" of retiring a debt).

The cons: This approach requires commitment, even in the face of unexpected obstacles. For example, an emergency expense that eats into the amount you've budgeted for debt repayment can seriously derail your progress, making it an even longer haul before you can retire your highest-interest debt.

Tip: If you have a student loan as part of your debt load, but you're in a non-repayment period — for example, if you're still in school — consider opening up a Scotiabank MomentumPlus Savings Account (MPSA).

By setting up pre-authorized contributions equivalent to the minimum monthly payment you would have paid on your student loan during this time, you can take advantage of MPSA's Premium Interest² periods.

And once you begin repaying your student loan, you can use the funds you've saved in your MPSA to help supercharge your debt repayment by making a lump sum payment toward your highest-interest debt.

With the debt consolidation method, you'll use a consolidation loan to pay off your other debts. The key to this strategy is that it lets you consolidate all your debt payments into a single monthly payment.

How the debt consolidation method works:

• Apply for a consolidation loan at your financial institution. Scotiabank, for example, offers the Scotia Plan Loan to help consolidate your debts and reduce interest costs.
• Compare the combined annual percentage rate (APR) of the debts you want to consolidate with the APR of your consolidation loan – a consolidation loan is ideal if the combined APR of your debts is more than the loan's APR. If you find the math getting tricky, an online consolidation loan calculator can help.
• Use the proceeds of this consolidation loan to pay off your other debts.

Why choose this method? A consolidation loan can be a good thing if you have a lot of high-interest debt, or you tend to make late payments (or miss payments altogether). And if the thought of a single monthly payment is less stressful, you should definitely give this method a closer look.

The cons: When it comes to finances, additional breathing room is great. But consolidating your debts won't be effective unless you can commit to not taking on any new debt while you're paying off your loan.

Tip: The optimal consolidation loan is one that offers you a lower rate of interest overall when compared to the debts you'll be paying off with the loan. Here's something to consider: Calculate the interest difference between your consolidation loan and these debts, and then save that difference regularly in a Scotiabank MomentumPlus Savings Account (MPSA). The win-win here? You'll get the advantage of Premium Interest periods³, plus you can use your accumulated savings to pay off other debt in the future.

So which of the following three debt repayment strategies is the right one for you? It depends on your personality, and your financial circumstances. The key is to select a strategy you can stick with. The right debt repayment strategy paired with solid financial habits can go a long way toward reducing your debt load.