How much credit is affordable

Having a lot of debt or having a good credit rating does not always mean that you are a good credit user. There are safe limits for debt and they are 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, which is $20,676 for a single person or $41,351 for a household of four, according to 2011 data by Statistics Canada. Feb 20, 2017, you may never be able to afford to use credit. The use of credit will make future cash less available and will cause a greater strain on the family’s budget. 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 at how much credit can you use before the debt payment is so tight that you and your family are struggling to manage your personal finances. Below are percentages of take-home pay estimates that would be 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

Getting Rid of 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 in 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. It’s time to face your financial problems. What you really need is a structured plan. Begin by assessing the debt load. Make a list of assets, income, savings and debts. Calculate how much income you will have coming in during the next 6 months and figure out how much you will need for essentials (housing, transportation, food, etc.). Now make a realistic plan that allows you to pay off your debts in small amounts and seek professional advice from a licensed Insolvency Trustee.