Avoiding debt traps and paying debt off

🟡 Intermediate · Step 10 of 22 · Topic: Credit & Debt

In one sentence

Some kinds of borrowing cost much more than they seem, and this post shows how to spot them and how to pay debt off step by step.

Words to know

Debt: money you owe and must pay back.
Principal: the amount you borrowed, not counting interest.
Minimum payment: the smallest amount you must pay on a credit card each month to avoid a late payment.
Payday loan: a small, short loan you repay from your next pay. It is a very expensive way to borrow.
Credit counsellor: a trained person who helps you make a plan to pay your debts.

Step 1: Watch out for the minimum payment trap

The minimum payment is small on purpose. But when you pay only the minimum, most of it goes to interest. Your debt shrinks very slowly.

FCAC says card companies usually set the minimum in one of two ways:

A flat amount, usually $10, plus interest and fees.
The higher of $10 or 3% of your balance. In Quebec, it has been 5% since August 1, 2025.

Your credit card agreement says which way your card uses. The Example below shows the real cost.

Step 2: Be careful with buy now, pay later

“Buy now, pay later” (BNPL) lets you split a purchase into smaller payments. It is still borrowing. FCAC explains the risks:

A missed payment can bring fees from the lender and a fee from your bank.
A 0% rate can jump after one missed payment. FCAC gives an example of 0% rising to 35%.
Fees can make the total cost higher than the price on the tag.
Small payments make it easy to buy more than you planned.

Several BNPL plans at once are hard to track. Write down every payment date. Ask the lender how it reports payments to the credit bureaus.

Step 3: Avoid payday loans when you can

Payday loans are fast, but very expensive. Each province sets its own rules. Lenders must have a licence in your province.

In Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island and Saskatchewan, the most a lender can charge is $14 for every $100 you borrow. FCAC says that is like an annual interest rate of about 365%. In Quebec and the territories, the general legal limit of 35% a year applies instead.

Here is FCAC’s example for borrowing $300 for 14 days. Checked October 2026.

Way to borrow $300 for 14 days	Example cost
Line of credit (8% a year, $5 fee)	$5.92
Overdraft protection (21% a year, $5 fee)	$7.42
Credit card cash advance (23% a year, $5 fee)	$7.65
Payday loan ($14 per $100)	$42.00

Miss the payday loan payment, and a $20 fee can bring the total to $362. FCAC also suggests other options first: ask for more time to pay a bill, ask your employer for a pay advance, or ask your bank about a small loan.

Step 4: Pick a way to pay off your debts

First, keep paying the minimum on every debt. Pay any overdue account first, because late payments hurt your credit. Then put every extra dollar on one debt at a time. FCAC describes two ways:

Highest interest first (the “avalanche”): you pay less interest in total.
Smallest balance first (the “snowball”): you clear one debt quickly, which helps you stay motivated. It may cost more interest over time.

When one debt is gone, move its payment to the next one. Both ways work if you stick with them.

Step 5: Get help early, from the right place

If debt feels too big, talk to a credit counsellor. FCAC says both non-profit groups and for-profit companies offer this, so ask what each one charges. No reputable agency charges for the first meeting.

Check that the agency is a member of a group such as Credit Counselling Canada or the Canadian Association for Financial Empowerment. In Quebec, look for an ACEF.
A counsellor may offer a debt management plan. You make one payment to the agency, and it pays your creditors.
Be careful with ads that promise to erase debt or “repair” credit fast. FCAC warns some are misleading.
For very serious debt, a licensed insolvency trustee can explain your legal options.

Example

You owe $2,000 on a credit card. The rate is 18% a year. You pay $60 each month, which is 3% of the starting balance.

Month 1: interest is $2,000 × 18% ÷ 12 = $30. Of your $60 payment, $30 pays interest. Only $30 reduces your debt. Your new balance is $2,000 − $30 = $1,970.

If you keep paying $60 a month, FCAC’s numbers show it takes 3 years and 11 months to pay off. You pay $793 in interest, so $2,793 in total.

If you pay $160 a month instead, it takes 1 year and 2 months. You pay $231 in interest.

The extra $100 a month saves $793 − $231 = $562. You can test your own numbers with the free FCAC Credit Card Payment Calculator.

Common mistakes

Paying only the minimum for months and not checking how long it will take.
Using several buy now, pay later plans at once and losing track of dates.
Taking a new payday loan to pay off the last one.
Paying a company to “fix” your credit before talking to a reputable credit counsellor.

✅ My checklist

☐ I listed all my debts with their balance and interest rate
☐ I pay at least the minimum on every debt, on time
☐ I chose one way to pay off debt: highest interest or smallest balance
☐ I know the real cost before I use buy now, pay later
☐ I know where to find a reputable credit counsellor

Next step → Step 11: Insurance basics: what you need and what you don’t