A couple considering credit counselling in Ottawa

What You Should Know About Your Debt Ratio

People facing difficulties in their financial lives may simply not know where to start to rectify their situation. Accumulating debt can be a slippery slope and happen before you even have a chance to grasp what is happening.

Although many people may be unaware of what a debt-to-income ratio actually is, learning your monthly figure on your own can be a good place to start. It is also very significant important as a matter related to your credit score and how to start rebuilding. Further, your debt ratio is relatively simple to determine.


How to determine your debt-to-income ratio

Individuals who are paying down debt each month would simply add all of their payments together from loans and credit cards, divide the number by the amount of income you produce each month, and multiply by 100. A number greater than 50 percent is not irreparable, but you should be mindful that this is considered high.


This is a clear indication that you are likely struggling with your finances, and it will also pose a much greater challenge if you try to obtain a mortgage or car loan since prospective lenders want to ensure you can afford payments and not default. If you are working to pay off your debt speedily, however, it is understandable to have a high ratio.


How you can lower your debt ratio

Most people can decrease their debt ratio to a more favourable figure below the recommended 36 percent with a couple different approaches. For starters, making more money may seem easier said than done, but there are some simple ways to try. Many people can ask for a raise at work if their performance is solid and if the company is in a position to provide raises to valuable employees. Consider obtaining a second job that allows for part-time hours, or do some overtime work to accumulate greater wages. However, you must be mindful of the additional tax which may be owing due to a second job.

You also may consider starting your own business. Before doing so, we recommend you seek the advice on an accountant to assist in the management and legal aspect of operating an at-home business.


Naturally, another solution to decreasing your debt-to-income ratio is by paying down your debt. Although you may have to temporarily increase the number to pay off the money you owe faster, which seems counterproductive in the short term, ultimately you will decrease this important ratio faster and more effectively by making more payments to your creditors.

How credit counselling can help you

Licensed insolvency trustees like the professionals at D. & A. MacLeod offer helpful services to clients facing financial difficulties. If you have determined you have a high debt-to-income ratio and are struggling with how to proceed, a reputable financial advisor is a good place to start for assistance. Credit counselling involves reviewing your personal finances to help you overcome your debt and make improvements to your money management.

They can provide useful services such as budgeting, adjusting lifestyle habits, and setting financial goals, as well as present debt solution options to arrange with creditors on your behalf and with your permission. Less impactful than filing for bankruptcy or a consumer proposal, you may qualify for a debt consolidation loan to make debt payments easier.


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