September 5, 2017

How do you know when you have too much debt, and what are you going to do about it?

There are many clues to having too much debt (credit) some of which seem obvious but others are not so clear.

According to recent statistical reports the average Canadian owes about 1.7 times annual income in debt.  So that begs two questions 1.  Who is the “average Canadian”; and 2.  What is the “average Canadian income”?

Presumably the “average Canadian” is every man woman and child over the age of 15 – that is a statistic commonly used – and the “average Canadian Income” is the mean and not the median.  The mean Canadian Income is about $28,000 gross per annum.

The problems with that data are distribution issues.   About 40% of Canadians earn far less than the mean income and many of them do not qualify for any form of debt.  The highest debt to income ratios actually belong to middle income earners – they have the most access to debt.  High incomes earners generally don’t need debt.

Banks use debt services ratios to determine how much debt their clients can carry, such ratios typically vary from 32-48% of gross annual income.  Considering that Canadians, on average, pay about 48% of their gross income in some form of taxes that doesn’t leave a whole bunch for living expenses.

So how much debt is too much?

If you need to use debt (credit cards or lines of credit) for paying utilities, food and groceries, clothing and other basic living expenses you have too much debt.

If you do have too much debt the first thing you need to do is regain control of your finances.  Open a new bank account somewhere that you do not owe money.  Develop a family budget and stick to it.  Pay aggressively on high interest debts then increase payments to lower interest obligations. If you find that you still need to resort to using debt (credit cards, etc.) for living expenses call our office for a free consultation to look at your other options.