Debt-to-Income Ratio
Calculating your debt-to-income ratio is another way to assess the state of your finances. The ratio compares the amount of your monthly debt (not including your rent or mortgage payment) to your total monthly income.
A debt-to-income ratio under 20 per cent is good.
A ratio over 20 per cent means you have too much debt relative to your income. If you are applying for credit, creditors may be unwilling to offer you attractive terms. As a result, it may cost you more to use credit and items, like a home or a car, to be beyond your financial reach.
Paying down your debt will lower the ratio and you will be more attractive to creditors.
Calculating your debt-to-income ratio is not difficult.
Here's how:
- Using your budget add up all sources of your household's monthly income, including your salary (after deductions), your spouse/partner’s salary (after deductions), HST/GST credit, alimony or child support, rental income, tips and commissions, child care tax benefit and even your income tax refund. This is your Total Monthly Income.
- Refer to your budget to make certain you do not overlook any of your debts. Add up all of your monthly debt payments based on their minimum payments. This is your Total Monthly Debt. (Don't include your rent or mortgage payments).
- Divide your Total Monthly Debt by your Total Monthly Income. The result will be a percentage, or your debt-to-income ratio.
Advantages of a low debt-to-income ratio:
- It appeals to new creditors.
- It shows financial stability.
- More money available to build savings/emergency fund.
Disadvantages of a high debt-to-income ratio:
- There is little money available for savings.
- It increases the chances for financial problems.
- Debt will cost more.
If your debt-to-income ratio is over the recommended percentage you are likely to fall deeper into debt or experience financial difficulties. You should make every effort to:
- Reduce your debts.
- Increase your income.
- Or both.
Your goal should be to pay down your debt so you can make your money work effectively and to become more attractive to creditors. Having a good financial profile will allow you to obtain the best available interest rates. Call (888) 213-8678 to speak with one of our trained credit counsellors at Consolidated Credit Counseling Services of Canada, Inc. for assistance in this area.
