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Managing Your Debt to Income Ratio: A Guide for Canadians

We get it: dealing with debt can feel like you’re navigating a maze in the dark. But don’t worry, we’re here to shed some light on an important aspect of your financial journey to help you understand it better: your debt-to-income ratio (DTI).  

But what is that, how does it impact your credit score, and if it’s too high how can you lower it?  

What is debt to income ratio?

Your debt to income ratio (DTI) is a percentage that helps you understand your monthly debt payments compared to your monthly income. This ratio is a percentage and is a valuable tool for both lenders and individuals to assess your financial health. 

To calculate your DTI, add up all your monthly debt payments (including credit cards, loans, mortgages, car payments, and other financial obligations) and divide this total by your total monthly income after taxes. Then multiply the result by 100 to get your DTI percentage. 

For example, if you owe $1,000 each month and you earn $3,000 each month, your DTI would be: ($1,000 / $3,000) x 100 = 33.33% 

What should your debt to income be?

Ideally, your DTI should be below 42%, but closer or less than 36%. Here’s a simple breakdown: 

  • Less than 36%: This is considered a healthy DTI. It shows that you have a manageable level of debt compared to your income, which is great for your credit score and financial stability. 
  • 36% to 49%: While this range is not bad, it also means that you’re getting close to a high DTI, which might limit your ability to borrow money in the future. 
  • Above 50%: A DTI above 50% is considered high and should be addressed as soon as you can. It can significantly impact your financial well-being and creditworthiness.

Why does debt to income ratio matter?

Your DTI matters because banks and other financial institutions use it to decide whether to offer you certain opportunities. If your DTI is too high, they might worry that you won’t be able to handle things like a mortgage.

1. Credit score

Lenders use your DTI to figure out if you’re a responsible borrower. A high DTI could mean you’re already stretching your income thin, which might hurt your credit score.

2. Financial stress

A high DTI can be a real buzzkill. When most of your cash goes to paying off debt, it leaves you with crumbs for essential stuff, savings, or emergency funds. That’s a recipe for financial stress.

3. Limited financial opportunities

A high DTI may limit your financial opportunities, such as buying a home, starting a business, or saving for retirement. Lenders may hesitate to give credit to individuals with high DTIs, which may also make it difficult to get approved for things like credit cards.

How to lower your debt to income ratio

If your DTI is higher than you’d like it to be, don’t worry—there are steps you can take to improve it: 

1. Create a budget

Start by tracking your income and expenses and setting limits for where you want to spend your money. Budgeting helps you spot places to cut back and free up funds for debt payment. It also helps you not overspend.

2. Prioritize debt repayment

Focus on paying down high-interest debt first, such as credit card balances. Making extra payments can help reduce your DTI over time.

3. Get professional help

Feeling swamped by debt and need a lifeline? We can help. Our Consumer Proposal can reduce your debt by up to 80%, all while keeping your assets safe.

How our Consumer Proposal can help 

Getting a Consumer Proposal with us is one way to take control of your debt and get back into financial good standing. Through a Consumer Proposal, we can provide relief from your overwhelming debt. Here’s how it works: 

You’ll meet with a Licensed Insolvency Trustee from Farber to assess your financial situation and determine if a Consumer Proposal is right for you.

2. Debt negotiation

Farber will work with the companies you owe money to in order to reduce your debt by up to 80%.

3. Single monthly payment

Instead of juggling multiple debt payments, you’ll make a single, budget-friendly monthly payment with no interest or fees.

Once your Consumer Proposal is a go, you’re protected from any debt-related legal actions. No more sleepless nights worrying about relentless collection calls.

5. Debt reduction

Over time, you’ll be able to reduce your debt load, ultimately lowering your debt to income ratio and improving your financial health.

By setting realistic goals, and exploring your options, you can take control of your debt and work towards a brighter financial future. 

If you’re ready to take the first step toward financial freedom, contact us today to get started on your journey to financial freedom.