Almost half of Canadian employees live paycheque to paycheque, and across the country, Canadians are in near-record debt levels. The average Canadian household spends just under 15% of its income on debt payments. If you’re curious as to where you stand in relation to the average Canadian, you can calculate what’s called your “debt-to-income ratio,” and also check your credit score.
A debt-to-income ratio is a formula that lenders use to measure someone’s ability to manage monthly payments on the money they intend to borrow. You can also use the debt-to-income ratio to determine how your debt numbers compare to the average Canadian’s.
The debt-to-income ratio of the average Canadian is $1.78. That means the average Canadian owes almost $1.78 to every dollar they earn. That’s just over twice what the average Canadian owed 31 years ago.
To calculate your debt-to-income ratio, add your monthly fixed debt payments, divide the total by your monthly earnings, and multiply the number by 100.
If your debt-to-income ratio is higher than 0.50 (50%), you might be in financial hot water.
Ideally, your debt-to-income ratio should be 0.35 (35%) or lower.
So, if your debt-to-income ratio is higher than that, the question becomes: How can you lower your debt-to-income ratio?
How to Lower Your Debt-to-Income Ratio
Torontonians with a debt-to-income ratio over 0.35 can reduce that ratio by paying off their debt.
One excellent way to pay off debt is to avoid common mistakes Torontonians make when paying off their debt. These common mistakes include
- Failing to adhere to a reasonable budget
- Not tracking financial progress
- Not improving financial literacy
- Taking out unnecessary loans
- Unnecessarily filing for bankruptcy
- Not saving enough
- Investing unwisely or not investing at all
- Falling for scams
Avoiding these common mistakes is an excellent way to pay off debt and decrease your debt-to-income ratio. But Canadians can get debt relief in other ways, too.
Debt Relief Options
Besides avoiding common financial mistakes, Canadians can get debt relief by taking out debt consolidation loans or enrolling through a non-profit credit counselling agency in a debt consolidation program (DCP).
Both debt consolidation loans and DCPs can provide debt relief by consolidating two or more of a Canadian’s unsecured debts into one lower monthly payment..
Note, however, that DCPs, unlike debt consolidation loans, do not offer loans. Instead, if you enroll, you will work with a certified Credit Counsellor who negotiates on your behalf with your creditors to drop or completely stop the interest on your unsecured debts and also round up these debts into one lower monthly payment.
Two other debt repayment options for Canadians are home equity loans and credit card balance transfers.
Canadians typically need to have a good credit score to qualify for debt consolidation loans. Canadians do not have to have good credit to qualify for a DCP.
If, like many other Canadians, you’re in debt and have a debt-to-income ratio over 0.35 (35%), there are ways to improve that ratio and free yourself from debt.
Besides developing healthy financial habits and avoiding common financial mistakes, you can apply for other kinds of debt relief options.
Which debt relief option is best for you depends on your financial situation and goals, so it’s important to do your research and speak to financial experts (such as certified Credit Counsellors) to figure out the plan that best suits your needs.