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Debt: the income outcome

Understanding debt to income ratio and its importance

Heading into the holiday season, my fiancée and I agreed on a strict budget when it came to gifts for one another.
Maybe it’s the power of love or maybe it’s because we are a tad competitive when it comes to who can elicit the biggest smile on Christmas morning, but both of us blew that budget out of the water. (I won, in case you were wondering.)
Sometime in the next week or so, a credit card statement will land in my inbox and with it my personal debt to income (DTI) ratio will have risen again.
Thankfully, it’s on par with the Canadian average, which, Statistics Canada announced just before Christmas, had hit an all-time high of 171 per cent in the third quarter of 2017. That equates to $1.71 in credit marked debt — consumer credit cards, mortgages and non-mortgage loans — for every dollar of household disposable income.
While the DTI isn’t the most in depth indicator of one’s financial health, it definitely helps understand one’s situation a little better.
The less you spend on servicing debt, the more you have toward other financial goals. However, the more you spend paying off debt, the more it can put you in a precarious position in the long term.
“You’re not retiring the debt, so you're almost on the forever and ever plan, and you're jeopardizing your financial situation that if interest rates rise and you're spending more and more of your income towards your debt, then that number is going to increase as interest rates grow and that's going to put you in an even more challenging position,” explains Jeff Schwartz, executive director of the non-profit Consolidated Credit Counseling Services of Canada.
There are some in the Canadian financial community, however, who insist that DTI lacks strength as an indicator. Schwartz says it’s because the figure doesn’t take into account one’s asset base.
“If your asset base is growing or let's say you've been a particularly shrewd investor in the stock market and we've gone through a particularly good time, then the debt to income ratio doesn't take into account what kind of assets you have,” he says, noting that one can tap into assets to help pay off debt.
One way or another, your DTI is generally the first thing that jumps out to potential lenders and creditors when they’re assessing the risk of taking you on as a client and the subsequent interest rates you’ll receive.
But they’re going deeper and looking closely at gross debt service ratio (GDS) and total service debt ratio. Again, the lower the number, the better off one is.
“It really brings it down to what you're spending on a monthly basis versus what you have coming in and the question becomes, ‘are you going to be able to afford this debt payment on a regular basis?’ and ‘what kind of risk is associated with that so you don't have to sell any assets?’” suggests Schwartz.
At Consolidated Credit Counseling Services of Canada (, they recommend calculating your DTI on a regular basis as a way to detect early warning signs and they’ve got a handy calculator ( that will churn out a percentage indicator from the budget figures you input.
If it comes up 36 per cent or less, you’re in good shape. If it falls between 36 and 50, it’s time to make some moves like channeling any extra cash toward debt and maybe even consider a debt management program. Anything above 50 is an indicator that your financial house is likely not in order and that it’s well past time to get some help.
If you’re not sure what moves to make and aren’t ready to incur the added expense of a contracting the services of a financial advisor, Schwartz encourages you reach out to his organization to speak with a credit counsellor free of charge to get a better understanding on your situation and the moves you can make to improve it.
At this time of year, with fresh debt on the way, the time to act is now.
“The key message there is don't wait, reach out and get help if you're confused, or at least look for resources that might be available to help you through.”


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