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Dangerous debt – living paycheck to paycheck – is obviously a warning sign to you

Dangerous debt seems to be a part of Canadian culture. Total consumer debt in America alone is now over $1.4 trillion, and 1.3 million bankruptcies were filed in 1999, up 69 percent since 1990. Not that being in so much company is necessarily comforting. But debt would not be such a terrible concern for our society if people were trained to see it creeping up on them to know what the warning signs of dangerous debt are. First take this quiz to determine your risk level.

• Do you live paycheque to paycheque?* Are you unaware or unsure of the total amount of debt you owe?
• Have you paid late fees and/or over-the-limit charges at least twice in the past year?
• Are your debt payments (other than your mortgage or rent) more than 20% of your gross (before-tax) income? 
• Have you received phone calls from creditors about overdue bills more than once during the past six months?
• Do you struggle to pay more than the minimum payment on your credit-card accounts?
• Would you be unable to meet your financial obligations for three months following a decrease in income or a costly emergency purchase?
• * Are money problems causing distress or conflict at home and/or work?
• Are you at or near your credit-card limit(s)?
• Have you borrowed from one credit card or taken a cash advance to help pay off another credit card at least once in the past year?

Dangerous debt threatens to kills financial health 

If you answered yes to even one of these benchmarks, you can stand to improve your financial well being infinitely, especially with the help of credit counseling companies listed within CanadianCreditCenter.com. They can help you put your creditors in check and teach you how to finance your lifestyle without going into even more debt.

There is also something you can do for yourself right here and right now -- calculate your debt-to-income ratio. A widely used measure of financial stability, you start by calculating your income, including things such as regular income from alimony and child support, tips, dividends and interest earnings. 

Next, list the current minimum payment on all your credit purchases and loans (except mortgages and rent). Be sure to include car payments, installment loan payments on furniture and appliances, bank/credit union loans, student loan payments, other loans/credit lines, all minimum credit card payments, and payments for past medical care. 

Finally, take these two totals, divide the monthly minimum debt payments by the gross income, and viola! You now have a solid number with which to evaluate your financial health. Generally, the lower your debt-to-income ratio, the better your financial condition. A recommended debt-to-income ratio is under 15 per cent. A ratio of 20 per cent or higher signals a need to control credit and to begin a plan for regaining financial stability. Ideally, you will carry little or no debt so your income can be saved, invested, or spent as desired, rather than used on interest.

Most importantly, you can avoid "creeping indebtedness" by staying aware of your debt-to-income ratio. Knowing your debt-to-income ratio will help you make sound decisions about making purchases on credit or taking out loans. Keeping your debt-to-income ratio under 20 per cent will help you avoid major credit problems. 

Also, since it is such a powerful indicator, lenders look at your debt-to-income ratio when they consider extending credit. Letting your debt-to-income ratio rise will jeopardize your chance of making major purchases, such as a car or a home, when you desire. Also, if your ratio is high, you will find it difficult to get additional credit in case of emergencies. As a bonus, if you keep your debt-to-income ratio low, you will more likely qualify for the lowest interest rates and best terms when you apply for credit. 

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