break the debt cycle

How to Break the Debt Cycle

Due to rapidly rising interest rates and inflation, Canadians are finding it harder to reduce the amount of money they owe. If you make your debt payments, but your balances aren’t going down or are increasing, you might be in a debt cycle.

Fortunately, there are steps you can take to break the debt cycle and free up your money for the things you value. This post will look at why you might be in a debt cycle, the steps to break the debt cycle, and where to find help if your debt load is overwhelming.

Causes of a Debt Cycle

Every situation is unique. However, there are common reasons you can end up in a cycle of never-ending debt. Inflation, high-interest rates, credit card debt, high-interest loans, income taxes, and job loss are often contributing factors.


The cost of living in Canada has increased significantly in the last two years. In November 2022, the annual inflation rate was 6.8%. On the other hand, the national base salary increase on average is expected to be 4.2% in 2023. Since wages are not keeping up with the cost of living, many Canadians are using credit to cover their basic living costs.

High-interest rates

The Bank of Canada raised interest rates seven times in 2022 in an attempt to bring inflation under control. Lenders pass on the rate increases to consumers by raising the borrowing rates. As a result, if you have a variable-rate mortgage, loan, or line of credit, your interest rates and the minimum monthly payments will have significantly increased in 2022.

Credit card debt

You’re not alone if you’re using your credit card to pay for basic expenses like groceries and gas. The average amount Canadians spend on their credit cards is $2,447 each month, which is 21.8% higher than in the same period in 2021. Two reasons for this are pent-up demand from the pandemic and the increase in the cost of living. Money isn’t going as far as it did, so oftentimes credit cards are needed to cover the shortfall.

If you have a balance owing on your credit card and you’re making the minimum monthly credit card payments, you may find your balance isn’t going down. If you’re still using your credit card, your balance might increase even if you make your payments.

Consequently, the payment can consist of a minimum principal amount, usually $10, and the rest of your payment is interest. Credit card interest costs are high, so while you may have a large payment, most of it will pay the interest owing on your outstanding balance.

High-Interest Loans

Loan rates are higher than they were due to the Bank of Canada’s rate increases. If you’ve taken on a new loan recently, you’ll find that a considerable amount of your payment is going toward interest. Higher interest rates mean higher payments, reducing the amount of money you have available for other necessities.

Alternative lenders offer loans such as payday loans at very high-interest rates. If you have a payday loan or a loan from an alternative lender, you could find yourself in a debt cycle since the high-interest rates make these loans difficult to pay off.

Income taxes

As an employee, your employer will deduct income taxes and remit them to the Canada Revenue Agency on your behalf. However, if the employer doesn’t deduct enough, it could mean you owe income taxes for the year. We often see this if a person has more than one job. Or, if you draw out some RSP to cover bills, generally this creates a tax debt.

Being self-employed means you are responsible for paying your own income tax. If you don’t plan carefully you could end up with a hefty tax bill at the end of the year.

The Canada Revenue Agency charges fees for late filings and interest on amounts owing. Therefore, unpaid income taxes can quickly become an enormous financial burden.

Job loss

Losing your job may be a major factor for having to use credit. There’s often a delay before receiving government support or finding a new job. Expenses can quickly add up, and so can your debts if you rely on credit to cover your loss of income.

Improving your financial literacy can help you break the cycle of debt. This podcast explores strategies to increase your knowledge about finances.

Getting out of Debt

There are several steps you can take to help break the debt cycle.

  • Review your finances.
  • Track your spending
  • Choose a strategy to get out of debt.

Review your personal finances

Gather the last few months’ statements for your bank accounts, credit cards, and other debts such as loans, leases, and mortgages. Calculate your income, how much you owe, what your payments are, how much you’re paying in interest, and your rates.

Review your personal expenses for utilities, housing, groceries, transportation, and personal care. The amounts you spend in these categories will help you set a reasonable budget for what you can expect to spend going forward.

Track your spending

Tracking your spending gives you an accurate picture of how your expenses compare to your budget. You can use a budgeting app or spreadsheet or manually track your spending. Having a realistic view of where your money is going will:

  • Let you know if you need to adjust your budget in some areas where you may have overestimated or underestimated expenses.
  • Highlight areas where you can cut expenses.
  • Show you if you have extra money available for debt repayment.

This is one of the most important things you can do. It is within your control to do this ; control the controllables !

Choose a strategy to break the debt cycle

Take a good look at your finances and see if there are ways to:

  • Stop using credit.
  • Reduce monthly expenses and put that money towards your debt payments.
  • Create a plan to pay off your debts.
  • Find a way to earn extra income.
  • Consolidate your debt into a loan so you’ll only have one payment.

Stop using credit

One of the most important steps to getting out of debt is to stop using your credit cards and lines of credit. Rates on these products are very high, and the amount of your payment that goes towards the principal is small. So if you continue to use them to cover shortfalls, the debt won’t go down and may increase.

Reduce monthly expenses

Check your spending to see if there are expenses you can cut. One place to look is monthly fees. You might be paying for services you don’t use or can find cheaper or free elsewhere. Bank fees, expensive cell phone plans, subscriptions, and gym memberships are some examples of services people pay for but often don’t need or use.

Choose a strategy

Two common strategies are paying off the debt with the highest interest rate or paying off the smallest debt first. Each method has advantages, so choosing one will depend on what works best for you.

Paying off the debt with the highest rate, known as the avalanche method, will reduce the amount of interest you pay. Once you pay the debt off, you can direct the payment you were making to the debt with the next highest rate and continue until you are out of debt.

Paying off the smallest debt first, known as the snowball method, can give you a sense of accomplishment and motivation to keep going forward. After the smallest debt is paid, you can put that payment towards the next debt you want to pay off.

Earn extra income

Working another job can give you extra income to pay down your debts. You can consider part-time work, remote opportunities, or a seasonal position to earn additional income.

Consolidate your debt

If you have available credit on a low-rate card or line of credit, you can transfer your higher-rate balances to reduce your interest rates. A lower rate might help you pay off your balances more quickly if you apply the same payments you made on the higher-rate cards to the lower-rate card.

Consolidating your debt into a loan will give you one payment to manage. Making your scheduled payments will get you out of debt at the end of the loan amortization. A consolidation loan can be a good strategy in the following circumstances:

  • You have a good credit rating to qualify for the loan.
  • Your interest rate is lower than what you currently pay on your debts.
  • You get rid of all your revolving credit, such as credit cards and lines of credit, so you don’t use them again.

If the loan rate is too high, it’s best to avoid it.

Contact us

Economic conditions are challenging right now, and you might find that nothing you do is working. However, help is available if you want solutions to manage your debts. The sooner you reach out, the more debt relief options will be available to you.

Please get in touch with Chase & Associates for a free, confidential consultation with a Licensed Insolvency Trustee. We provide advice and debt solutions to help you regain control of your finances and get a fresh start.

Derek L. Chase, CPA, CA, LIT

Being able to offer debt help assistance to individuals and corporations on a more intimate basis was a driving force in completing a “second CPA” by becoming licensed by the Federal Government as a Licensed Insolvency Trustee (previously Trustee in Bankruptcy) in 1997. It is extremely satisfying to be able to witness lives change for the positive due to a restructuring of financial affairs.