Should You Pay Off Debt or Save First in Canada?

You’ve got $340 left at the end of the month, a credit card balance you’ve been carrying since spring, and nothing in savings. So should you pay off debt or save first?

Do both, in this order. Catch up anything past due, put $500 to $1,000 into a savings account and leave it there, then send everything else at your highest-rate debt while a small automatic transfer keeps running in the background. After that, the arithmetic isn’t close: applying a dollar to a balance at about 20% is worth roughly ten times what the same dollar earns at the best ongoing savings rate in the country.

Canadian households now owe $1.80 for every dollar of after-tax income (opens in a new tab), a ratio that has climbed for six straight quarters, while the household saving rate sits at 3.5%. Most people reading this are carrying both problems at once, which is exactly why the ordering matters.

What order should you do it in?

Steps 1 through 4 are sequential, so work down them and stop where your money runs out. Step 5 runs alongside all of them.

1. Catch up anything past due. Late fees and credit damage accumulate faster than interest on anything else you owe.
2. Get $500 to $1,000 into savings. Small, boring, and the rest of the plan depends on it.
3. Take any employer RRSP match you’re leaving behind. A 50% match is a 50% return the moment it lands.
4. Attack your highest-rate debt with every spare dollar, while paying minimums on everything else.
5. Keep a small transfer running the whole time, even $20 a week.

Why past due accounts come before your worst rate

This is the step almost every article skips, and the Financial Consumer Agency of Canada puts it ahead of choosing a strategy at all (opens in a new tab): before you pick which debt to target, deal with what’s already behind. Missed payments hurt your credit report directly, extra charges pile on, and a long-enough delinquency gets handed to a collector. None of that is fixed by optimizing interest rates.

Why the buffer comes before the 20% card

On paper, a $1,000 buffer earning 2.75% while you carry a $1,000 balance at 20% is a bad trade. It costs you about $180 a year once the tax on that interest comes off. It’s still the right move, because the alternative isn’t a clean payoff. Without a buffer, the first unexpected $600 goes on the card, and you’ve paid interest to end up where you started. Paying that toll once is cheaper than paying it every time something breaks.

Where to keep it

Somewhere separate from your chequing account and reachable in a day or two. A no-fee high-interest savings account is the usual answer. Ongoing rates top out near 2.9% right now, though Tangerine and Simplii run promotional rates of 4.50% to 4.60% for about five months before dropping under 1%, so check the end date before you open one. Our roundup of the best high-interest savings accounts in Canada tracks both. If you want the full version of this step, we wrote a guide to building an emergency fund.

Why does paying off a credit card beat any savings account?

Because you’re comparing two very different returns, and one of them is taxed. Interest you earn in a regular savings account is income the CRA taxes at your full marginal rate (opens in a new tab). Interest you avoid by paying down a balance isn’t income at all, so nothing is taken off it.

FCAC’s own example puts a typical card at 19% on purchases and 22% on cash advances (opens in a new tab), and plenty of Canadian cards sit at 19.99% or higher. Meanwhile the Bank of Canada held its policy rate at 2.25% in July 2026 (opens in a new tab), which is what keeps ongoing savings rates in the 2% to 3% range.

The number that settles it

At an Ontario marginal rate of about 30%, a 2.75% savings account nets you around 1.9%. To match the 20% you save by clearing a credit card, a non-registered account would have to pay roughly 28% before tax. Inside a TFSA it would still need 20%. Nothing in Canada pays either.

Put it in dollars. Carry $1,000 on a card at 19.99% for a year and it costs you about $200. Hold that same $1,000 in a 2.75% savings account and you earn $27.50, or about $19 after tax. Same thousand dollars, roughly ten times the gap.

Which debts should you pay off first?

Once past due accounts are handled, FCAC describes two workable strategies, and both are legitimate. List every debt with its balance, minimum payment and rate, then pick your order.

Highest rate first is cheaper. Lowest balance first finishes something sooner, and finishing something is worth more than most spreadsheets admit, because a plan you abandon in month four costs more than a slightly inefficient one you finish. Whichever you choose, keep paying minimums on everything else.

Don’t forget the debts that don’t look like debts

Buy now, pay later plans belong on the list, and so do unpaid utility bills, property tax arrears and money borrowed from family. FCAC counts all of them. The ones with no stated interest rate still carry late fees, and those can work out to a higher effective cost than a credit card on a small balance.

Which debt should you pay off last?

Your Canada Student Loan, and this is where the standard advice gets Canada wrong. Effective April 1, 2023, the federal government permanently eliminated interest on Canada Student Loans and Canada Apprentice Loans (opens in a new tab), including loans already in repayment. The federal portion of your balance charges nothing.

That changes the ranking completely. Putting an extra $200 a month against a 0% loan saves you exactly zero dollars in interest. Put the same $200 a month against a card at 19.99% and you avoid about $220 of interest in the first year alone. Make the minimum payment on the student loan, on time, and send the extra somewhere it does something.

Two caveats worth knowing. Interest that accrued before April 1, 2023 is still yours to pay. And the provincial half of an integrated loan follows provincial rules, so several provinces charge interest on their portion while others have dropped it; check with your province’s student aid office rather than assuming.

There’s a real emotional pull to killing the student loan first, because it’s the debt that feels like a chapter you want closed. Once the expensive balances are gone, that’s a perfectly good reason to do it. Doing it before then just costs you money.

Why keep saving while you pay off debt?

Because the plan that works on a spreadsheet and the plan you actually finish are rarely the same plan. Sending 100% of your spare money at debt for eighteen months assumes eighteen months in a row go to plan.

A buffer prevents the loop

Every dollar of buffer is a dollar of future borrowing you don’t do. That’s the whole argument, and it’s why FCAC’s guidance is built around a budget that balances savings and debt payments rather than choosing one. A $700 car repair paid from savings costs $700. The same repair on a card, paid off over a year, costs closer to $780.

The habit is the part you keep

The transfer is worth more than the amount in it. When the debt is finally gone, the freed-up payment has somewhere to go, because the account and the automatic transfer already exist. People who stopped saving entirely tend to absorb that money into spending within a couple of months instead, and there’s nothing to show for two years of discipline. If money is genuinely tight right now, we wrote about how to build a budget that survives contact with real life.

How Lodavo fits in

Paying down debt is a long stretch of doing the right thing with nothing to show for it week to week. Lodavo is a free app that rewards the saving side of that: connect the bank account you already use, and the balance you build gets you free tickets in a weekly cash draw, with a guaranteed prize of at least $100 going to a user every week and a top prize of $10,000. Lodavo never holds your money, and you can read exactly how the draw works on our provably fair page.

It’s not a debt tool and it won’t lower your rate. What it does is put something on the calendar during the boring part, which is usually the reason people quit.

Ready to make saving worth looking forward to?

Get the highest-rate balance gone, keep the buffer, and keep the transfer running. Download Lodavo free on the Apple App Store (opens in a new tab) or Google Play Store (opens in a new tab) and start earning tickets for the weekly draw.

Terms and conditions apply. No purchase necessary (alternate method of entry available). Skill-testing question required. Open to legal residents of Canada who are the age of majority. Odds depend on the number of eligible entries received. Full rules and odds at our contest rules.