Is your Debt-to-income ratio too high?

When I was checking my email this morning, the headline in the sidebar caught my attention.  “Average Canadian family debt reaches $96,000…” it announced. I figured that must mean consumer debt, not consumer debt plus any mortgage debt. Nope, wrong again!

The Globe and Mail also reported similar numbers, but the headline was a little more revealing – Household mortgage debt reaches all time high.

The sickening feeling in my stomach started to brew as I realize my debt, including my mortgage, is far bigger than this. The article then notes the average person’s debt-to-income ratio is 145%.  Ok, I’ll bite. I have no idea what my debt-to-income ratio is.

Ccruising around the net and I found a handy calculator to determine personal debt-to-income ratio. As my heart raced, I put in my numbers.  I was shocked to see that I was in <36% category, which they categorized as a healthy debt load. Huh?

For a moment, my heart returned to a normal rate, and I felt pretty comfortable.  Thankfully, this false sense of security only lasted for a moment.

The calculator asks for minimum payments on credit cards and lines of credit.  For many people, who may not know how to read their credit card bills, sometimes the minimum payment doesn’t even cover the interest!  This strategy would take people many, many years in order to settle their current debts, and presumes they don’t add to them.

The other factor that a calculator can’t take into account, is the state of interest rates right now.  We have been spoiled. Interest rates are at an all time low.  In Canada, Bank of Canada chief Mark Carney has promised to hold the line on interest rates until June.  What happens past June?  Well, it can’t go any lower.  At some point, the rates will go up.  How fast and how high remains to be seen, but they will go up by some measure. That will impact the minimum payments that folks are required to pay.

While this faceless calculator may be telling me “that’s okay, you’re doing fine – as you were young lady“, I’m not taking any comfort in it.  Sure, the situation may be fine today.  For somebody with no emergency savings, not even a month of living expenses tucked away, a job that can disappear with one phone call with no safety net – I won’t get too cozy.

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