How Well Do You Manage Household Debt?

The Bank of Canada recently released new statistics about household debt loads across Canada. How does your household compare?  

The December 2008 Bank of Canada report revealed that 4.4% of Canadian households had a Debt Service Ratio of 40% or above. This compares to 6.3% of US households. But what is a Debt Service Ratio, and how can you calculate yours?

Debt Service Ratios

A Debt Service Ratio, or DSR, is one way to measure  how much debt a household carries. Your DSR measures how much of your take-home household income is spent on repaying debt.

How do you calculate your DSR?

• First, add up all the income that comes into your household in a month, after taxes and not including government transfers such as the Canada Child Tax Benefit.
• Then, add the total payments that you are required to make on your outstanding debt in that month – including credit cards, car loans, personal or bank loans, and mortgage.
• Finally, divide your total monthly debt repayment amount by your total monthly income amount. This will give you the percentage of your take-home pay that must go to debt repayment each month. This percentage is your personal Debt Service Ratio.

A Debt Service Ratio above 40% means your household is in the “debt danger zone.”  For instance, debt repayments of $1,400 per month on a take-home income of $4,000 will put you at the edge of the danger zone – any more debt and you are at risk of not meeting your debt repayment commitments each month. It also means that any interruption to your household income might threaten your capacity to stay afloat financially.

The Bank of Canada found that about 600,000 Canadian households had dangerously high debt levels. Where do you stand?