HOW MUCH CREDIT IS AFFORDABLE?

Having a lot of debt or having a good credit rating does not always mean you are a good credit manager.  There are safe limits for debt based on your monthly net family income.  This proportion will determine whether you are able to afford the monthly payments.

If your income is less than the poverty line in Canada, you may never be able to afford the use of credit.  Use of credit will make future cash less available and will cause a greater strain on the family’s money.  The more you are committed to paying towards debt the less money you will have for necessities.

If, however, you have a reasonable income, you need to look realistically as to how much credit can you use before the debt payment is so tight you and your family are struggling to manage your personal finances.
Below are percentages of take home pay needed for payment on non-mortgage debt with indicators of potential risk.

10% or less = Ideal
11-15% = Safe 
16-20% = Manageable (20% limit)
21-25% = Caution exceeding manageable limit
26-30% = Attention credit problems may occur
31-35% = Danger credit problems likely to occur
36 + = Extreme danger credit problems certain

Shedding Debt

It is easy to overlook interest charges on your bank account and credit card.  Rarely do we actually check to see what we have already paid interest over the past year.

A warning sign of overspending is not opening bills and avoidance of money discussions with your partner.  Before you know it, you are in debt, stressed out and unhappy with life.

Don’t bury your head in the sand – but face your problems.  A structured plan setting out what to do is what you really need.  Begin by assessing the debt load.  Make a list of assets, income, savings and debts.  Calculate how much income you will have in the next six months and see how much you need for essentials (housing, transportation, food, etc.).  Now make a realistic plan that allows you to pay off debts in small amounts if necessary.


Excerpts from the Office of the Superintendent of Bankruptcy Canada’s “The Financial Guide”

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