There is no such thing as good debt or bad debt. There is only debt whose interest rate is above or below what your money could otherwise earn — and one of those two numbers is certain.
Compare the debt’s interest rate with your realistic expected investment return. Paying off a 19.99% credit card is a guaranteed, tax-free 19.99% return and nothing in investing reliably beats it. As a working framework: above ~8%, clear the debt first; between 4% and 8%, it depends on your tax situation and temperament; below ~4%, investing usually wins mathematically. The avalanche (highest rate first) minimises interest; the snowball (smallest balance first) wins on motivation.
"Good debt" and "bad debt" are useful shorthand and terrible analysis. A mortgage on an overpriced house at 6% is not good because it is a mortgage. A 4% loan used to buy a depreciating car is not bad because it is a car loan. What determines whether borrowing helped or hurt is one comparison:
What makes debt repayment so powerful is that one side of that comparison carries no uncertainty. If you owe $8,000 at 19.99% and you pay it off, you have earned 19.99%, guaranteed, tax-free, immediately. There is no market risk, no sequence risk, no fee, and no tax on the gain — because it is not a gain, it is an avoided cost. To match it with investments you would need a reliable 19.99% pre-tax return, and no such thing exists.
This is why high-interest debt sits second in the account waterfall from Lesson 2.4, above every registered account. A guaranteed 20% beats a possible 7%, and it is not close.
The card's minimum payment is 3% of the balance. Paying only the minimum, the balance falls slowly, because most of each payment covers that month's interest.
| Monthly payment | Time to clear | Total paid | Interest paid |
|---|---|---|---|
| 3% minimum (declining) | 286 months — 23.8 years | $17,730 | $9,730 |
| $250 | 46 months — 3.8 years | $11,524 | $3,524 |
| $300 | 36 months — 3.0 years | $10,666 | $2,666 |
| $400 | 25 months — 2.0 years | $9,811 | $1,811 |
Look at what the minimum payment structure does. On the first payment, $8,000 at 19.99% accrues about $133 of interest, and the 3% minimum is $240 — so barely $107 touches the principal. As the balance falls, the minimum falls with it, keeping you in almost exactly the same ratio for two decades. The minimum payment is not designed to clear the debt. It is designed to keep the debt alive while remaining affordable.
The practical instruction: fix your payment in dollars, not as a percentage. Decide on $400 a month and keep paying $400 even as the balance shrinks. That single change is what collapses 24 years into two.
With several debts, you make minimum payments on all of them and direct every spare dollar at one. Which one is the whole debate.
| Avalanche | Snowball | |
|---|---|---|
| Attack order | Highest interest rate first | Smallest balance first |
| Total interest paid | Lowest possible | Higher |
| Time to first win | Can be long | Short — a debt disappears quickly |
| Best for | People motivated by the maths | People who have started and stopped before |
The avalanche is mathematically optimal, always. It minimises total interest by definition, because it removes the most expensive dollar of debt first. If you can stick with it, use it.
But the research on actual repayment behaviour is stubborn: people are meaningfully more likely to complete a snowball plan, because closing an account produces a visible, discrete win that sustains the effort. A snowball you finish beats an avalanche you abandon in month seven. Personal finance is only partly about arithmetic.
The hybrid most people should use: clear anything above roughly 15% by avalanche without exception — that tier is too expensive to sacrifice for motivation — then snowball the remainder if the psychology helps. A $600 store card at 8% and a $9,000 student loan at 5% are close enough in rate that killing the small one first costs almost nothing and buys real momentum.
Once the expensive debt is gone, the question gets genuinely close. The framework below uses realistic long-run expectations rather than hopes.
| Debt rate | Usual answer | Reasoning |
|---|---|---|
| Above 8% | Pay the debt | A guaranteed 8%+ tax-free return exceeds a realistic expected equity return after tax and volatility. |
| 4% to 8% | It depends | Close to expected returns. Tax treatment, whether registered room is available, and how much the debt bothers you all matter. |
| Below 4% | Usually invest | Long-run expected returns exceed the borrowing cost, and inflation erodes fixed-rate debt in your favour. |
Three refinements that change the answer:
The mathematically optimal answer and the right answer for a specific person are not always the same. Someone who cannot sleep while carrying a 4% mortgage and who would abandon an investing plan during a downturn is better served by paying the mortgage, even at a small expected cost. A plan you will actually follow beats an optimal plan you will not. Just make the trade knowingly, rather than telling yourself the maths supports it when it does not.
Compare the interest rate to your realistic expected return, and remember that debt repayment is guaranteed and tax-free. Above roughly 8%, clear the debt — nothing in investing reliably beats a guaranteed 8% after tax. Below roughly 4%, investing usually wins mathematically, especially inside a TFSA or RRSP. Between 4% and 8% it is genuinely close, and your tax situation and temperament decide it.
The avalanche — highest interest rate first — is mathematically optimal and always pays less total interest. The snowball — smallest balance first — produces faster visible wins and people are measurably more likely to finish it. A snowball you complete beats an avalanche you abandon. A sensible hybrid is to clear anything above about 15% by avalanche without exception, then snowball whatever is left.
Run the other side of the comparison. Model what the money you would put toward debt could earn if invested instead — then ask whether that expected, uncertain return really beats the guaranteed one you would get from repayment.
Educational purposes only — not financial, investment or tax advice. RiskStock is not a registered dealer, adviser, or tax professional. Nothing in this course is a recommendation to buy or sell any security or product. Tax and benefit figures are for the 2026 tax year, were verified against official sources on 2026-07-27, and change annually — confirm your own numbers with the CRA and a qualified professional before acting.