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Credit Card Debt

Credit card debt, by nature, requires nuance. It’s good to have some, but not too much. The more you need a good rate, the harder it is to get one. Sifting through the evergrowing credit card options available to choose just the right card for you. Let’s stop the cycle. Here’s all the information you need to get out of credit card debt and then stay out.

Table of Contents

  1. Understanding credit card debt and its impact
  2. Main sources of credit card debt
  3. Good debt relief options
  4. Bad debt relief options
  5. Staying out of credit card debt

Understanding credit card debt and its impact

The best way to understand the importance of managing credit card debt well is to get clear on what happens when it’s not. Some consequences are more serious than others. Some are easier to reverse and under our control than others.

Credit score

Missed payments are the number one factor to drive down a credit score. The three numbers that make up your credit score may look little, but they are not to be dismissed. They have a big impact on your life!

  • Credit scores cast a wider net of implications than you might suspect.
  • Some employers use it as a gauge of how good a potential employee would be.
  • Insurance companies include it in their algorithm that calculates what rate to charge you.
  • Creditors rely on it to decide whether to offer you credit or not.

Do you see just how much influence credit scores have over your finances?

To make it clear, here’s another way to look at it. A bad credit score means getting hit by both sides of the world of finances.

On one side, you are restricted as to how much money you have access to. This is by way of the kind of work you can get and the likelihood of creditors lending you money. On the other side, you’re forced to pay more to live. Most often by way of higher premiums or interest rates. Sometimes even for necessities, like housing.

There’s no room for doubt. Your credit score has a direct impact on your finances. Handled incorrectly, a bad credit score can be the beginning of a slippery slope into unmanageable debt.

Luckily, there are things you can do to take control of your score.

Wage garnishment

When a client fails to pay their credit card bill for a prolonged time, the credit card issuer can opt to take more serious actions. One of these actions is wage garnishment. This is when a credit card holder’s employer is issued a court order to deduct an approved amount from the employee’s paycheque. The amount varies depending on the circumstances but can be as much as half of the cardholder’s paycheque. The employer is required to send that money to the creditor to pay off what the cardholder owes.

Account levy

Similar to wage garnishment, to action an account levy the credit issuer goes through the court system to force payment. The difference is that, instead of the employer, it’s the cardholder’s bank that’s issued the court order. The order requires the bank to take money out of their client’s account and send it to the creditor to repay what is owed.

Charge off

A credit card issuer can also opt to do a charge-off when the client has been delinquent for a prolonged period of time. This involves the issuer closing the account and then selling the debt to a collection agency. Meaning, the cardholder no longer has access to the account. Even so, they are still liable for paying off the debt. Only now they’re dealing with persistent debt collectors and a hit to their credit score.

Psychological and physiological impact

Finances are one of the leading causes of stress. The FP Canada™ 2023 Financial Stress Index revealed that 36% of people have experienced anxiety, depression, and mental health challenges due to stress about finances.

Health Canada says that prolonged stress can cause “insomnia, errors in judgement and personality changes. You may also develop a serious illness such as heart disease or be at risk of mental illness.” Should these errors in judgment occur in and around finances it can end up worsening a person’s financial situation further. In other words, the beginning of a spiral into more and more debt. Leading to the need for more serious consequences and drastic measures to course correct for a better financial footing.

Main sources of credit card debt

Credit card debt can come about in a variety of ways. Commonly, we correlate people being in debt with those who regularly overspend. While that can be the case, the leading cause of credit card debt is actually a lack of knowledge. Many simply don’t know how credit cards work. This knowledge gap leads them to use their credit card in a way that increases their debt load. Some basic credit card knowledge that can help prevent this include. Below are a few key things to know about using a credit card wisely.

Annual Percentage Rate (APR)

Also known as a credit card’s interest rate, APR is the percentage at which you are charged for maintaining a balance on your credit card. Though there are others, this is the main source of income for credit card issuers.

The average interest rate for a credit card is a whopping 19%. To make matters worse, credit card companies compound interest. Which means cardholders pay interest on their interest. It’s these high rates and the practice of compounding that cause many to struggle to pay off credit card debt. 

Only paying the minimum

As helpful as minimum payments can be to current cash flow, they don’t do much good for the bigger picture of someone’s finances. Yes, making minimum payments will keep your credit report free of bad news. They will also do a good job of keeping you in debt.

Minimum payments are often so low you don’t make any headway on actually paying down the credit card debt. As mentioned earlier, credit cards compound their interest rates. With no real reduction in debt, interest charges keep piling up. To keep this from happening, it’s best to put as much as you can towards paying off the card each month. Ideally, in full.

Credit limit increases

Getting a notice in the mail that you’ve been approved for a credit limit increase can be flattering and exciting. It’s also one of the most common ways people end up drowning in debt.

Having access to the extra funds can be a good thing, especially in the case of an emergency. It can also lower your utilization ratio, which in turn can increase your credit score.

On the other hand, the extra funds can also tempt people into overspending. Getting pre-approval from the credit card company can feel like a permission slip to spend more. While you technically do have permission to spend more, more often than not, it’s not a good idea to actually go through with it.

Before accepting a credit limit increase, honestly ask yourself, “Is doing this really what’s in my best interest?”

No emergency fund

The greatest defence against credit card debt is an emergency fund. A credit card is a convenient option when something unexpected happens. There are no applications to fill out or meetings with lenders. In the long run, going that route will cost you dearly. It’s not much of a stretch to say that having money set aside to dissuade an easy swipe can be the one thing that keeps finances from unravelling.


Over and above interest charges, there are a number of common fees credit card companies charge. Below are some typical fees associated with credit cards. It’s a good idea to check your credit card agreement to verify which ones apply to your card. Being aware of them and how to minimize, or even avoid, them can go a long way in keeping debt manageable.

Late fees

Late fees occur whenever a due date passes and no payment is made. Be aware that if you’re a long-term customer who typically makes payments on time, credit card companies will often waive these fees. This won’t be the case every time. If it’s your first time paying late, it’s worthwhile giving your company a call and seeing if they will.

Annual fees

Certain credit cards require a payment each year in order to maintain the account. These annual fees are normally added to your statement each year. Once you’ve proven yourself to be a good client that pays on time, give your company a call to see if they will start waiving the fee. If they won’t, it’s a good idea to switch to one of the numerous no-fee cards available.

Balance transfer fees

When switching from one credit card to another you may be charged a balance transfer fee. Sometimes the charge is based on a percentage of the balance being transferred. Other times it’s a flat rate of around $5 to $10. If the company uses both methods, it will go with whichever one is greater. These fees are also automatically added to your account, at the time of the transfer.

Read your contract carefully when doing a balance transfer. Companies tempt people with very low-interest rates, but they typically only last for a certain period of time. Knowing your particular card’s terms will help you plan the transfer so that you can make the most of the move.

Cash Advance Fees

Essentially, a cash advance is taking out a loan from the credit card issuer. Instead of a product or service, you’re “purchasing” cash you can use elsewhere.

Cash advances are a particularly quick way to add to debt. Here’s why. Typically, not only is there a fee for doing the advance, but you also pay extremely high-interest rates on the money taken out. Even higher than the usual interest rate for the card. Also, unlike normal charges that have a grace period, interest on cash advances starts accruing immediately.

Good debt relief options

Self-directed debt relief

With some planning and dedication, depending on the circumstances, it is possible to get out of credit card debt on your own. Here are some tips that have proven to help successfully get rid of credit card debt

Setting Goals and Staying Financially Disciplined

As the saying goes, if you fail to plan, you plan to fail. Take time to go through your budget. Look at what you can realistically afford. Make adjustments to lower your expenses. Cut things like unused subscriptions and cash advance charges. Then put the rest towards paying off your credit card debt. To make the most of that money, there are two effective methods you can use: avalanche and snowball.


The main idea behind the snowball method is motivation. Here’s how it works.

You pay the minimum balance on all your credit cards. The only exception is the card with the lowest balance. All of the extra money you have to go towards paying off your credit cards is put towards the balance on that card. Once that card has been paid off you move on to the next lowest balance.

Many people get a sense of accomplishment from paying off their credit cards. If you’re one of them, use that boost to keep you going until they’re all paid off.


The focus of this method is saving as much money as possible.

Similar to the snowball method this approach involves making minimum payments on all cards but one. In this case, the card order you use is the highest to lowest interest rate. By paying the highest interest rate card first you’re saving the most in terms of interest charges.

Negotiate with creditors

One way to take on credit card debt that may not come to mind immediately is negotiating with your credit card companies. Most card issuers are willing to hear you out and see what kind of agreement can be worked out. They would much rather get some of their money back than none. There are a few different negotiation options available.


Ask to pause your payments for a specific amount of time. Some card issuers may even waive any interest, fees, and penalty charges. This method does take some work. Credit card companies need proof that you are indeed experiencing financial hardship.


This option is similar to a deferment but with smaller payments on a modified schedule instead of skipping them outright. This is also sometimes called a debt repayment plan.

Workout Arrangement

If you’re really struggling to make credit card payments you can try negotiating for a workout agreement. This option should only be considered as a last resort. The credit card company agrees to a modified payment plan in exchange they reduce, or even waive interest charges and penalties. The catch is, they will freeze your account so you can no longer use it.

One important thing to note about a workout arrangement, the debt must still be with your original creditor. Once the debt is moved on to a collection agency this method won’t be available any longer. When you read about debt management plans below you’ll see that it is very similar to this option. The difference is that it’s time-consuming because you are doing all of the leg work yourself. Talking through negotiations on your own can be difficult. On your own, you won’t necessarily have the backing of proof that you’ll follow through with the new plan. Credit card companies may not be as inclined to give as good of a deal as if you were to work with a Credit Counsellor. Often, lenders rely on the fact that credit counsellors have a track record of working with clients to ensure payment.

Debt Settlement

Debt settlement involves negotiating with creditors to accept partial payment of the total debt owed as full payment. Typically, those opting for debt settlement end up paying between 20 – 80% of their original debt total. The lower end of the range is usually only accepted in rare situations.

While this option is one of the cheapest options for getting out of debt, it tends to be a less accessible option. These settlement offers tend to require a lump sum payment, something many people simply don’t have access to.

There’s a much higher likelihood of successfully negotiating a debt settlement success if you work with a professional. It’s worth being aware that these companies, by law, are not allowed to charge a fee unless the negotiations are successful. At that point, they usually charge a fee equal to a percentage of how much money they were able to save you.

Getting out of debt with some help

Balance transfers

Carefully executed, a balance transfer can be a great option for getting finances back on track. The overall idea of a balance transfer involves moving the outstanding balance of your current credit card to a new card. The key is that the new card has a lower interest rate, usually, as an introductory offer. Often, the introductory offer is a 0% interest rate for a limited time. This means the entirety of each payment made goes towards paying off the principal balance. These offers typically last between 6-18 months. They normally also involve a small fee equal to a percentage of the balance being transferred or a flat rate between $5 and $10.

It’s important to use this method with full clarity on the terms of your new credit card agreement. Miss a payment or don’t pay off the full outstanding balance before the introductory offer expires and you’re back where you started. Possibly even worse off.

Balance transfers are a good option for those with a good credit standing and steady cash flow. It’s best to avoid the temptation to incur more debt by closing your old credit cards once the balance transfer is complete. This will likely result in a small, temporary dip in your credit score. Applying for the new credit card will result in a hard credit check on your account. This will also cause a small, temporary dip in your credit score.

Government help

Fortunately, the Government of Canada offers a number of programs to help those in need, like financial struggles. Some of them include:

  • Employment insurance
  • Social assistance
  • Tax credits and benefits
  • Housing programs
  • Skill training grants

Debt Management Program (aka credit counselling)

Debt Management Programs (DMP) are a great debt relief option for those struggling financially. They work best for those who need help but aren’t in such dire circumstances that they require a consumer proposal or bankruptcy. In a way, a DMP offers the same benefits as a balance transfer without the need for a lump sum payment. Credit Counsellors negotiate a better interest rate (usually 0%) on your behalf. This saves participants hundreds (if not thousands) of dollars. With the new rates in place, you make regular payments to the credit counsellor. They then distribute the funds to your creditors.

There are a couple of other significant advantages to using a DMP other than lower interest charges. Because these programs still require you to pay back all the debt owed it is seen favourably by credit bureaus. While participants may see an initial drop in their credit scores, in the end, scores will actually improve. These programs also offer the benefit of convenience. Instead of paying each creditor separately, you make one simple payment to the credit counsellor.

Debt consolidation

Debt consolidation, like a balance transfer, involves switching out one debt service for another. It involves taking out a loan with a much lower interest rate. The loan should be large enough to cover the outstanding balance of all your debts.

Switching to a lower interest rate will save you money in the long run. This also provides the simplicity of making one payment instead of several. Typically, these loans have fixed payments, instead of fluctuating, making it easier to budget.

This option can come with a couple of catches. Some lenders will require that you close all your credit accounts. The terms of your loan rely heavily on your credit score and your credit score will likely drop. It also means losing access to credit. Which, for those that tend to overspend, can be a good thing. On the other hand, it can make it tricky for those who don’t have an emergency fund and find themselves in a tough financial situation.


Bankruptcy is for those in dire need of a financial fresh start. They owe so much money it would be impossible for them to recover without a full financial reset. This reset comes with disadvantages and advantages.

  • It’s one of the quickest debt relief options
  • Collections calls, along with any other actions, will stop immediately
  • Depending on the province some of your assets will be protected
  • Credit score will take a significant hit for a minimum of 7 years, if not longer
  • It will be difficult to get access to credit and make large purchases like a house and car
  • Some assets will have to be liquidated
  • Can affect your job opportunities 
  • There are some debts, child support for example, that cannot be discharged through bankruptcy

Declaring bankruptcy involves a lot of bureaucratic work, as such, to do one you must utilize the services of a Licensed Insolvency Trustee. They will prepare and submit all the required paperwork, represent, and guide you throughout the entire bankruptcy process. The whole process normally takes 9 to 12 months.

There are strict guidelines to follow when it comes to bankruptcy. All of them are laid out in the Bankruptcy and Insolvency Act. Among other things, these guidelines outline:

What assets are exempt

How much each creditor will receive and in which order
The rules both the debtor and creditor must follow during and after the proceedings

Once the court and creditors are satisfied that all of the obligations of a bankruptcy are fulfilled it is discharged. This is the beginning of the bankruptee’s fresh financial start. It’s important to make the most of this new beginning by having a plan in place to avoid ending up in debt again and to rebuild credit.

The significant impact of bankruptcy means it’s best used as a last resort. All efforts to explore and use other debt-relief alternatives should be made before filing for bankruptcy.

Consumer proposals

A consumer proposal is another debt-relief option that should not be entered into lightly. While the consequences are not quite as severe as a bankruptcy they are still significant. Your credit score will drop dramatically, some assets may have to be liquidated and it could affect certain job prospects.

Consumer proposals also require the services of a Licensed Insolvency Trustee. The trustee will file the required paperwork and represent you during negotiations with creditors. A consumer proposal works by negotiating with creditors. It starts with the trustee preparing a proposal outlining the terms of a new agreement.  Which typically includes offering a significantly lower amount than actually owed as the full and final payment of a debt.

Creditors are given the opportunity to review the proposal and then vote on whether to accept it or not. Votes are weighted based on the percentage each creditor is owed of the total debt. Once the proposal is accepted the debtor makes regular payments to the trustee. Typically, payments last between 3 to 5 years. Once the payments are finalized all the debts are considered cleared and a certificate of completion is sent to the debtor.

During the entire process, and for a time after, the debtee’s credit report will reflect the fact they have done a consumer proposal. This limits their access to credit.

Like a bankruptcy, not all debts are eligible for discharge and not all assets are impacted by a consumer proposal. The trustee goes through all the debtee’s assets and debts to determine which can be included and which can’t. Also, similar to bankruptcy, consumer proposals are legally binding agreements. Once the process starts the filer has immediate protection against action from creditors.

Bad debt relief options

Taking on more debt

When faced with struggle it can be tempting to go for the easy fix. In the case of finances, the easy fix is more debt. You get another credit card or even worse a payday loan. You can convince yourself that it’s just to tie you over until you get back on your feet. Or that you’ll pay off that vacation in no time.

It can be easy to overlook that there’s a point of no return when it comes to debt, but there is in fact one. Like a boat taking on water, our sources of income can only handle so much debt. The sooner the issue is addressed the easier it will be to get back on track and the fewer long-term consequences you’ll face.

Friends and family

Borrowing from friends and family isn’t an uncommon practice. Angus Reid Institute did a study in 2023. They found that approximately one in four households that made $50,000 or less borrowed from their friends or family. The fact that it’s not uncommon doesn’t necessarily make it a good idea. Why? Once money gets added into the mix of a relationship, it’s also not uncommon for, sometimes unrepairable, issues to follow.

Look to friends and family for help in other ways, like:

  • Researching options to get out of debt
  • Holding you accountable for reaching your financial goals
  • Teaching you what they know about finances

If money does exchange hands make sure:

  • You have a clear terms agreement in place
  • Only lend money you can afford to lose
  • Have a plan to make sure you don’t get back into debt


Taking money out of your long-term savings sets you back threefold. The first setback is using the money for something other than what it was set aside for. The second is missing out on the interest that money could make for you. Finally, using long-term savings often comes with hefty penalties.

There are way more cost-effective ways to navigate financially hard times. You’ll be grateful you took the time to find one of them later on during retirement.


Using money from an insurance policy can help with current financial struggles. It can also mean creating future financial troubles for loved ones.

Money taken from an insurance policy isn’t money that’s free and clear, it’s a loan. When paying out an issuance claim that has a loan against it, the amount borrowed along with interest and fees is deducted from the payout. That’s money family and friends won’t have access to when they need it most. It could even mean they end up struggling financially to cover your final expenses. A legacy no one wants to leave behind.

Home equity

The low interest rates that come with using home equity can make it a tempting choice. Temptation, as it often does, comes with risk.

One advantage to credit card debt is that it’s unsecured debt. Any actions taken to recover unsecured debt on the part of the lender means going to court. While not ideal it’s, arguably, a better scenario than losing your house.

A home equity loan, on the other hand, is a secured debt. Secured debt is always tied to collateral of some sort like a car or a home. Securing a debt permits lenders to take the collateral should you default on your loan. It’s a way for them to protect themselves and their investment. In other words, defaulting on a home equity loan could mean losing your home.


Staying out of credit card debt

Increase financial knowledge

Education is hands down the best path to financial health. The more you know the better financial decisions you’ll make. Research a couple of reliable places to learn about finances. It can be a TV show, influencer, podcaster, or website. Commit to keeping up with what they’re sharing. This will go a long way to keeping you up today and finances top of mind so you stay focused on your financial goals.

Responsible credit card usage

One of the most impactful topics to learn about is responsible credit card usage. The way a person uses their credit card correlates directly with their financial health. Take time to learn about:

  • How credit card interest is calculated and why it can lead to an overwhelming debt load
  • The various credit cards available and what kind is best for you
  • The impact different credit card actions have on your credit score

Live within your means

Yes, for most of us living within our means means making some sacrifices, but it also has priceless perks. The most valuable being peace of mind. Knowing you can cover all your financial obligations is one of the greatest stress reducers available to us.

If you don’t know where to start, give the 50/30/20 rule a try. If you don’t know where to start, give the 50/30/20 rule a try. Using these guidelines means:

  • 50% of your budget goes towards covering all your expenses
  • 30% goes to discretionary
  • 20% goes towards savings

These guidelines keep you focused on your financial goals. They’ll also help you prioritize how to spend your hard-earned money in the way that best suits you and your lifestyle.


Keep things simple. Find ways to make taking care of your finances easy. One of the best ways to do that is to automate payments. The fewer payments you have to stay on top of the less likely something will fall through the cracks. It also means fewer places you need to review to make sure everything is going as it should. Best of all, the less strenuous and time-consuming it is to do your finances the more likely you are to do them.


The most valuable tool in a financial toolkit is your budget. Creating a thorough budget gives you a full picture of what money is coming in and where it’s going. That’s important for several reasons. Having a reviewing your budget regularly will help you:

  • Relieve mental stress by knowing all your bills are covered
  • Adjust your spending if need be and early enough to course correct without taking on debt
  • Achieve financial goals

Mindful spending

Little splurges add up over time. Buying things you don’t need or use is a waste. Spending money on things that break down a lot isn’t the best way to go either. When you decide to buy something it makes sense to put in a little time to think through the purchase before spending the money. This is especially true for bigger purchases or things you use a lot. Make sure what you’re getting is the best option for you and that you know where the money is coming from before you buy. That way you’ll always maximize how you’re money is being used.

Build an emergency fund

One of the leading causes of credit card debt is emergencies. An emergency visit to the vet or mechanic can be the start of a spiral into debt. Your best defence against this is having an emergency fund available.

Generally, it’s recommended to have between 3-6 months’ worth of savings ready to go in the case of an emergency. These funds should be put somewhere safe, easy to access, and interest-bearing.

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