Are you feeling unsure about where you stand when it comes to debt? Learn some key factors to consider when you’re evaluating your personal debt situation and overall financial health – we’ll also note some things you can disregard, and where to get help if you’re a BC resident looking for professional debt management services or advice.
Personal Debt Assessments – Why & How
Just as it’s a good idea to have a regular check-up with your doctor and dentist, and routine maintenance done on your vehicle, checking in on your finances is key to keeping on top of money matters. Without a regular check-in it can be all too easy to simply navigate on financial “auto-pilot” and not recognize when things are headed for trouble, particularly when it comes to debt.
How Do you Feel About your Debt?
First and foremost, set aside “the numbers” – you are often the best gauge of your own financial health. If you’re feeling any of the following in relation to managing your debt or overall financial situation, it may be a clear sign that it’s time to seek professional debt advice:
- Overwhelming stress about your finances
- This debt-stress often manifests with physical, emotional and/or psychological impacts
- Worry, anxiety or fear about money and debt
- Alienating yourself from family or friends due to embarrassment or stress about spending or debt
- Ongoing arguments with your spouse or partner about money
- Constantly thinking about your debt
Many people find themselves frustrated trying to get to debt-free, and often feel as though their best efforts just haven’t been enough to pay off all their debt. In our experience as Licensed Insolvency Trustees, a debt-cycle or money problem can happen to anyone and there are many factors and events outside of our control that can derail even the best laid plans.
Although it might initially feel defeating to ask for help, a Licensed Insolvency can be a great resource to you in clearing debt and meeting your debt-free goals. At Sands & Associates we take a non-judgmental and supportive approach to debt help services – you can even connect with one of our friendly debt help experts from the comfort of your home. Book your free debt consultation here.
When it comes to “on-paper” tactics, you can start your personal debt assessment with the following:
Check Your Credit History
Even though it’s generally recommended to review your credit report about once a year, this is a financial chore that often falls by the wayside. From inaccuracies and errors to fraud and other surprises, an unkempt credit history can be hiding a lot of financial hassle – don’t get caught unaware!
There are two main credit bureaus in Canada: Equifax and TransUnion. It is a good idea to check your reports with both since one may have different information than the other. There are a couple of ways you can access your credit report:
- Online: By visiting the website of Equifax you can complete a request to have your credit history reports mailed to you (recommended), or for a cost you can access your credit history reports online. For TransUnion, you can complete requests to obtain your Consumer Disclosure.
- If you opt for this route, make sure you’re not inadvertently signing on for subscriptions or information that has a cost – different “packages” that contain additional information will be available for purchase. You only need to see the basic credit history report or Consumer Disclosure, which is free.
- By mail: You can fill out and submit forms to request a copy of each of your credit reports be mailed to you. You can obtain copies by mail for free once a year!
- You’ll need to fill out the request forms in entirety, attach necessary identification documents and either mail or fax the request form to each credit bureau. Alternatively you can call either agency to request copies of your credit reports be mailed to you.
Though it may seem surprising at first read, one thing you DON’T need in evaluating your personal debts is your credit score, as outlined in further detail below.
Your Credit Score
A credit score alone is not an accurate rating of your financial health and cannot be relied on to gauge your finances on a daily basis. It’s also important to note that whatever credit score is calculated by the credit bureaus, each lender uses their own set of calculations to calculate a credit score for their purposes which could be quite different than the score you are able to access directly from Equifax and/or TransUnion. Also consider the following:
- Person A has what they would consider an optimal credit score and makes their minimum monthly payments on time, keeping their account in good standing – but they can’t afford to pay off their debt outright, nor will they be able to have the balance to zero even in the next 5 years.
- Person B has just finished a personal bankruptcy proceeding and, therefore, immediately following the personal bankruptcy, Person B’s credit score will be poor. However, they’re now debt-free and can start to rebuild and accumulate savings because of the “reset” the bankruptcy has provided.
- And then there’s Person C who has only one credit card, which they use only infrequently as they often pay cash for purchases and always pay any balance in full each month. Having a minimal credit history makes it difficult for lenders to assess their “lendability”, therefore they have a lower score than a person who may juggle multiple accounts.
Quite often despite good-standing credit, lenders determine that a person is essentially maxxed-out, meaning that “good” credit score may not provide much (if any) advantage when it comes to assessing your progress in paying off debt. It’s also important to know that a credit score can change rapidly. People often go from very poor credit scores immediately following a bankruptcy to having rebuilt credit sufficiently to qualify for a mortgage if desired in as little as two to-three years following the conclusion of their insolvency proceeding.
Calculate Your Debt-to-Income Ratio
Your debt-to-income ratio is a personal finance ratio often used by lenders when you’re applying for credit, but it is also a measure that can be useful for you to see just how “affordable” your debt-load may be. Here’s how to find your ratio:
- Add up your gross (before tax) monthly income
- Add up your debt payments plus monthly rent or mortgage payment as well as child support you may pay
- Credit card payment
- Student loan payment
- Car payment
- Other monthly debt payment
- Divide the total of your monthly debts by your monthly gross income and multiply by 100. This percentage is your debt-to-income ratio.
Some experts suggest that your total debt payments (including a mortgage) should add up to no more than 35-40% your gross monthly income. If you’re not a home owner and are looking at this ratio with money owed on debts other than mortgage debt (but including credit card balances, vehicle loans etc.), then the recommended consumer debt payments are no more than 15-20% of your gross income.
- It’s important to remember many guidelines are primarily for lenders in gauging whether or not to issue you credit, with the thought that low debt-to-income ratios indicate a person is more likely to manage their monthly payments well and repay the debt over time.
- When it comes to the question of “how much debt is OK?”, the answer to that largely depends on your personal circumstances. An “ideal” debt-to-income ratio for you personally may be much lower than for a lender.
Consider how much of your income is going towards servicing your debt, as well as your housing costs. A high debt-ratio may be an early indicator that your debt load has the potential to become unmanageable – be wary if debt is taking a significant amount of your income as this can indicate a highly risky overall financial situation.
Do you truly know where all your money is going? Whether you are trying to achieve your debt-free goals, or are already there and wanting to maintain your financial health, having a balanced budget is key:
Check in With Your Budget
One of the biggest mistakes people make when it comes to budgeting is simply not comparing their estimates of what they will bring in and plan to spend with their actual incoming and outgoing funds.
- A successful budget should be tracked, checked and revisited regularly. For many people this will be part of an ongoing monthly plan.
- Though putting money aside for savings often comes last in terms of priorities, it’s important to know that savings can be a major advantage during a financial emergency. Consider the following:
- Do your income, household expenses and debt payments leave you enough room for: emergency savings, retirement needs, other financial goals (vacation, large purchases, etc.)?
- Set up automatic withdrawals to a savings account (even if it’s a small amount) each month so you’re saving something.
Although any type of debt be difficult to manage if you find yourself in a position where you can’t make your payments, not all debts are created equal in terms of urgency if you are struggling to maintain payments. As outlined below, certain debts have a much higher risk of compounding into an ongoing problem if they go unpaid.
Types of Debt You Carry
When you assess your debt consider and categorize with some of the following in mind:
- Provided they are affordable, debts you incur with the expectation of a future benefit such as a mortgage on your home or a student loan to pursue a career.
- Debt you incur for something that loses value or benefit quickly. A common example would be non-essential credit card purchases where you will carry a balance.
- Many debt management professionals caution that two types of debt that could be considered “urgent debt” and potentially a sign that you may be headed towards financial trouble:
- Payday loans (and/or instalment loans through “payday loan lenders”)
- Government debt (taxes, outstanding student loans, etc.)
As well as how much and the types of debt you have also consider your:
Are you able to make all your payments on time, every time – or has your personal financial situation left you falling into (or near) warning-sign habits such as:
- Shuffling money from one credit account to another (ie., Taking from one credit card to make a payment on another).
- Trying to ignore your debt, or avoiding account balances (or hiding them from your partner).
- Accumulating more debt:
- Relying on credit to meet day-to-day living expenses.
- Considering (or already) using payday loans.
- Taking on more/new debt while you are working on paying off a consolidation loan.
One payment distinction that should NOT be taken as a measure of success:
Only Making Minimum Payments
As a direct result of high interest charges and fees, only making your minimum monthly payments on credit card or line of credit debts often means you’re stuck in a debt repayment cycle that can last for many years and stop you from truly making progress towards being debt-free. Even a small $1,000 balance on a credit card that charges 18% interest could take up to 10 years to pay off making just the minimum monthly payments due!
Try doing the “Rule of 60” math:
- Divide your total non-mortgage debts by 60 – does the number look like a monthly payment you could afford in order to pay your debts off in 5 years?
- If that 5-year figure barely fits your budget (or not at all) then you may benefit from restructuring your debt working with a Licensed Insolvency Trustee to put together a debt payment plan.
Whether your debt-free goals feel within reach or seem too far away to imagine, know that you are not alone – Sands & Associates is here for you if you need professional debt advice at any point. BC residents can access qualified government-endorsed debt help services by connecting with a Licensed Insolvency Trustee (no referral is needed) and confidential debt consultations are always free. Our caring debt management specialists across the province are here to help with non-judgmental advice and solutions.
Get professional help assessing your debt and explore all your options for becoming debt-free – knowing is not owing! Book your free confidential debt consultation with a friendly debt expert today.