Its not surprising that Canadian household debt is on the rise. The low cost of borrowing has made it so much easier for consumers to service their debt. Some experts have gone on to say that Canada’s household debt ratio has hit an all-time high.
But what does that mean to you?
To answer that, you need to understand what debt load is.
Debt load is used to describe a consumer’s amount of debt. Lenders and creditors will compare your income with your debts to determine whether you are carrying the appropriate amount of debt or if it’s problematic. The debt to income ratio is calculated monthly; and reveals how good or poor your financial situation is.
Here’s how to calculate your debt to income ratio:
Debt load payments include the following: mortgage payments or rent, car payments, credit card payments, student loans, personal loans and lines of credit.
Take your total monthly debt load payments and divide by your total monthly income. Multiply by 100.
Total monthly income: $2,500.00
Total debt load payments: $1300.00
$1,300.00 / $2,500.00 = 0.52
0.52 x 100 = 52%
In this example, your debt to income ratio is 52%.
A debt ratio of 36% or less is considered good. However, if you only included your monthly minimum credit card payments, your debt ratio will be underestimated. A debt ratio of 50% or more is considered very dangerous. In the example above you should consider seeking professional advice from A. Farber and Partners Inc. to help in assisting you with reducing your debt load.