Debt counselling can help consumers who have incurred significant debt achieve financial freedom. Some of the warning signs of accumulating debt include:
- Zero or little monthly savings
- Relying on your credit card to pay for basic necessities, like food and gas, because very little income remains after paying your bills
- Worrying about your ability to make minimum monthly payments on your debts
- Obtaining a cash advance from one credit card to pay another card
- Constant calls from bill collectors
If any of these things describe your current financial situation, you may be in need of debt counselling.
Another way to determine if you have significant debt is by calculating your debt-to-income ratio. Your DTI is one of the financial benchmarks used by experts to determine your ability to borrow or take up more debt without struggling to repay.
Steps to Calculate Your Debt-to-Income Ratio:
Step 1: Calculate the total cost of debt obligations each month
List monthly recurring debts that may include:
- Rent or mortgage (principal, interest, insurance, and taxes) or home equity loan payments
- Student loans
- Auto loans
- Minimum credit card payments
- Furniture loans
- Alimony or child support payments
- Any other recurrent debt
If you pay the full credit card balances each month, don’t include them. Also don’t include basic expenses like food, gas, utilities, and taxes.
Step 2: Calculate your household gross monthly income
Simply add up all the amounts you receive every month, including:
- Gross income (before taxes and deductions)
- Overtime or bonuses
- Child support or alimony
- Other income
Step 3: Calculate your DTI
Divide your total cost of monthly payments with your monthly gross income, expressed as a percentage.
Implications of your DTI ratio
If your monthly payments amount to $1,500, and you have a net monthly take-home pay of $3,500, then your debt-to-income ratio is 1500 divided by 3500 which equals .43 – or 43 percent.
A debt-to-income ratio of 36 percent or less is considered a healthy debt load. It means that you can settle all your monthly debts with about one-third (or less) of your monthly income, leaving you with enough for basic needs and even savings. You should, however, avoid incurring more debt.
When to consider debt counselling
Statistics based on the assessment of mortgage loan repayments indicate that borrowers with a high DTI are more likely to have problems making their monthly payments. Consumers with a DTI between 37 and 42 percent should start reducing their debt.
Consumers with debt-to-income ratio of over 43 percent are likely in financial trouble, and should seek solutions to repay and avoid excess debt. At over 50 percent, you should definitely seek professional help from a licensed insolvency trustee.