Compound interest can be a powerful financial tool — but when you’re in debt, it often works against you. While compound interest helps your savings grow faster in investments, it can just as easily cause your debt to spiral if balances aren’t paid off quickly.

Crowe MacKay & Company’s Licensed Insolvency Trustees explain how compound interest can extend your debt's life—and how you can stop it from costing you more than you borrowed.

What Is Compound Interest?

Compound interest occurs when interest is charged not only on your original balance (the principal) but also on the interest accumulating over time. In other words, you’re paying interest on interest.

If you carry a balance from month to month on a credit card or line of credit, your lender adds unpaid interest charges to your total balance. The next time your interest is calculated, it’s based on this new, larger amount — and the cycle continues.

Simple Interest vs. Compound Interest

However, revolving credit, such as credit cards and lines of credit, typically uses compound interest, which means your debt grows faster if you’re not paying it off in full.

How Compound Interest Works in Practice

Let’s look at a simple example:

Imagine you have a credit card balance of $1,000 with an annual interest rate of 19% — roughly the average rate in Canada in 2025.

If you pay $30 per month, it will take you about 4 years to pay off that balance, assuming no new purchases are added. By the end, you’ll have paid around $1,440 total, meaning $440 is interest alone.

Now compare that to a simple interest scenario. Without compounding, the balance would be paid off in roughly 33 months, saving you more than a year and several hundred dollars in interest.

This example highlights how a small balance can grow quickly if you make only minimum payments.

The Real Cost of Minimum Payments

Credit card companies design minimum payments to keep your account in good standing — but not to help you pay off your balance quickly.

Continuing with the same $1,000 example:

Paying only the minimum monthly payment (around 3% of the balance) could take more than 10 years to pay off that same debt. Over that time, you’d pay around $900 in interest — nearly equal to the original amount borrowed.

That’s why minimum payments are one of the biggest traps for borrowers. They keep you paying just enough to avoid penalties, while your balance barely moves.

Tip: Use an online credit card repayment calculator to see exactly how long it will take to pay off your debt — and how much interest you’ll pay over time. Seeing the numbers in black and white can be a powerful motivator to take action.

How to Break Free from Compound Interest

If you’re already feeling trapped by growing balances, some options can help you stop interest from building and get your finances back on track.

1. Increase Your Payments

Adding an extra $10 or $20 to your monthly payment significantly reduces the time it takes to pay off your debt and the total interest you pay.

2. Consolidate or Refinance

If you qualify, a debt consolidation loan or balance transfer can help you move high-interest debt into a lower-rate loan. This reduces compounding and simplifies repayment.

3. File a Consumer Proposal

A Consumer Proposal is Canada's most effective legal debt relief option. It allows you to formally agree with your creditors to repay a portion of your debt over a fixed period — without any further interest charges.

Once a proposal is accepted, your payments go entirely toward reducing your balance, not interest. For many people, this can shorten repayment timelines from decades to just a few years.

Break Free from the Weight of Compounding Debt

If growing interest charges make managing your debt impossible, professional help can make all the difference. Crowe MacKay & Company’s Licensed Insolvency Trustees have been helping Canadians overcome financial challenges for over 50 years.

With free, confidential consultations, we’ll help you explore practical debt relief options — from personalized budgeting to debt consolidation or a Consumer Proposal — so you can take control of your finances and move confidently toward a debt-free future.