Debt’s a normal part of life. You take out student loans to get an education, you need a car loan to get to work and drive the kids to school, and you celebrate when you qualify for a mortgage to buy your first home.
On top of it all, there are lines of credit you can tap into when you need urgent home repairs, or you plan on making renovations, and credit cards for holiday shopping, vacations, or everyday spending. It all adds up, though, and if you’re starting to feel the pinch, you might be wondering if you’re in too much debt.
How Much Debt Is Too Much?
Zero debt is a great life goal, but for most families, it’s not a realistic goal for right now. As long as you can keep up with your bills, you might feel like everything’s fine. However, even if you’re staying up to date, you might be in too much debt.
Get Your Debt Assessed
One way to determine if you should be more worried about your financial situation is to get a free debt assessment with a certified credit counsellor.
In a debt assessment, a certified credit counsellor will:
- Review your expenses, budget, and total debts
- Get your credit report and credit score
- Provide budgeting advice, money management, and tips for saving money
- Tell you about debt relief options
It’s an opportunity to get a complete and accurate view of your financial situation. From there, you can find a way to reduce your debt and keep more money for yourself and your family.
How to Determine if You’re in Too Much Debt
Debt-to-Income Ratio: Your debt-to-income ratio is a good objective number that can tell you if you’re carrying too much debt. It’s one of the factors lenders use to decide whether or not to approve your loan application.
Calculate it by dividing your monthly debt payments by your gross monthly income (before tax), then multiply by 100. Include mortgage payments, car loans, credit cards, etc.
The ideal number is less than 20 percent, but that’s far from realistic for many families. Given rising home prices in Ottawa and across Canada, you should know that generally, lenders will approve loans to applicants with a debt-to-income ratio of around 40 percent.
You Pay for Necessities with Your Card: One of the most dangerous debt traps you can fall into is paying for necessities with your credit card and carrying the balance over month-to-month. It’s a sign that your expenses are too high for your income, which could be the result of high loan repayments leaving little money for essentials.
You’re Depleting Your Savings: If you’re reaching into your savings account to make sure your credit card bill or utilities are paid on time, you’re already in dangerous territory. A lack of savings can turn an uncomfortable debt situation into a nightmare. You need an emergency fund to soften the blow of a serious expense, such as emergency home or car repairs.
Get a debt assessment if you’re starting to feel the pinch. The sooner you act on debt, the better.
