Highest Balance or Highest Interest Rate to Avoid Alberta Bankruptcy?

In the early months of 2011, Canadians appear to have gotten serious about paying down debt. In Alberta, bankruptcy filings declined somewhat in 2010, but total household debt reached a record high, surpassing total household debt in the United States. Extremely high levels of debt leave Albertans unprotected against economic shocks and are a major contributing factor to personal bankruptcy filings.

Assuming you still have a stable source of income, what steps do you need to start paying down your debt?

First, you need to look at your complete financial situation to see how much of your income you can afford to go towards faster debt repayment. Many Albertans only pay the minimum monthly payment, with an occasional addition of a few dollars in good months. To get out of debt faster you need to speed up the process and the surest way to do that is to cut back your expenditures to the bare minimum needed to live without extreme deprivation. Skipping a vacation to Bermuda is not extreme deprivation. Planning to survive on nothing but macaroni and cheese dinners until you are out of debt is extreme deprivation.

Once you know how much additional income you can apply to the problem, you need to list your unsecured credit accounts in rank order. While some might rank by total debt owed, most experts advise ranking by highest interest rate. In the long run, you will save a few dollars by shedding your highest interest debt as soon as possible. However, since more of your payment goes towards interest, it will take you longer to pay down a higher rate credit card.

In a sense, one could make the same argument about saving money in the long run in favor of paying off highest balance cards first. Even with a lower rate, the size of the balance may mean you are actually paying similar amounts in interest charges each month. What is really important here is not which you choose, but that you make a choice and get the process going. If you have four credit cards, put every dime of your newly found income into one card – the one with the highest amount of the payment going towards interest -- and pay only the minimum on the remaining cards.

Once you have paid off your first choice, add the amount you were paying to the minimum payment on the second card on your list. Financial experts call this the snowball effect, as the additional payment you apply to each subsequent card speeds up the repayment process.