In what seems like good news for borrowers the Bank of Canada has eased off on its threat to raise interest rates if Canadians do not get control of their debt. In effect, household debt management has taken a back seat to a continued sluggish economy.
The Bank of Canada feels Canadians have started to listen to previous warnings to manage their household debt levels. Credit growth appears to be slowing. Tighter mortgage insurance rules have slowed mortgage credit.
But that does not mean you should be less concerned. Far from it.
Assess Your Own Household Debt Management
The problem with much of what we read in the papers about household debt is that it focuses on the average Canadian. But how are you doing? Are you managing your debt well or should you be concerned?
Monthly Debt To Income Ratio – Your Debt Burden
One way of looking at how well you are managing your debt is to calculate your ability to meet your monthly debt repayments. By doing so you can see if you are spending too much of your income paying off debt. Banks often use this calculation of debt-to-income to assess whether or not they will loan you more money. Calculating this ratio is simple. Use our Debt-To-Income Ratio Calculator.
If, for example, your family makes $4,000 a month and you spend $200 on credit card payments, $250 on car loans and $2,400 on rent your monthly debt-to-income ratio would be: $2,850 ÷ $4,000 = 71%. But what does this mean:
- Most lenders consider a ratio of 36% or less a healthy debt load. A word of caution however. If your ratio is below 36% because you included only the minimum payments on credit card debt recalculate this ratio assuming you target paying off your credit card debt within one year. Use a credit card repayment calculator to figure out what your payments should be.
- A ratio between 45 and 50% is cause for concern. Make a household debt management plan to start paying down your debts to avoid trouble down the road.
- A ratio of 50% or more is usually considered dangerous. You should make a plan to aggressively pay off your debts. At this level you may want to consider seeking professional help to severely reduce your debt.
While interest rates may stay low for a while longer, it is important to assess your own household debt management. Find out how at risk you are and if necessary, ask for professional advice.