Being in debt: Awareness, Warning Signs and Getting Out

Canadian households have continued to increase their debt level during the third quarter of 2011, bringing it to 151% of disposable income, which could make it, eventually, the “Sword of Damocles” hanging over the financial security of consumers for years to come.

“Abnormally low interest rates have allowed the ability to manage these high levels of debt relatively well, until now. But the Governor of the Bank of Canada, Mark Carney, has warned Canadians that they should exercise caution with their credit applications, as interest rates are going to reach ‘normal’ levels, sooner or later”, as stated by Michael Gregory last December, senior economist of BMO Capital Markets.

Speaking of indebtedness, it’s through awareness that the recovery process starts, and for some, that time has already come. Desperate times call for desperate measures!

Warning Signs that Indicate a Debt Too high

1) Obtaining an advance from one credit card to pay the balance of another, or worse, only paying the minimum required. A handy method of payment, the credit card is only beneficial to you if the entire balance is paid monthly in order to avoid the almost usurious rates charged by financial institutions.

2) Repetitively paying just the minimum amounts on credit cards. Having a significant balance to pay on your credit cards is often a sign of financial incapacity and occurs when faced with unforeseen events or some of life’s blows. In the same line of thought, using credit to “finance” the acquisition of basic goods, such as food, clothing, medication, etc., indicates financial constraints that should not be lightly considered.

3) Late payments on rent or mortgage, or if you’re incapable of paying for public services before the due date. A call from a collection agency should sound the warning bells loud enough to summon you to action.

4) Certain lines of credit (mortgage or not) and adjustable mortgage rates are particularly sensitive to the fluctuations of interest rates. An increase, even small, could have an impact on the monthly budget of property owners who have borrowed beyond their true repayment capacity. This is also what Philippe Ventura, CFA, President and Chief Financial Security Advisor at Chevalier, Meunier & Associés explains in his most recent French post “If you have a mortgage of $250,000 payable over 20 years, are you prepared to be subjected to a monthly increase of $276.13 in your actual payments in the event that the interest rate will climb up 2%?” he asks. Actually, if you feel suffocated by reading just this paragraph alone, it’s perhaps a sign that your level of debt relies more heavily on the family budget than you realize.

5) Monthly payments so high that they rule out any possibility of savings are yet another symptom of excessive debt.

Steps to Getting Out

1) Nothing better than starting with good ol’ Excel, listing all debts you’ve incurred in detail. For example, the first line could be “Installment plan purchase, ABC Furniture Store, remaining balance $6,000, 18% interest rate, $300 monthly payment, deadline in 16 months.” Each debt, including credit cards, should be indicated in this manner.

2) A plan of attack. This is where a software application like Budget Express becomes essential. Here, the objective is to determine the monthly amounts available to channel them towards reducing overall debt. The first thing to consider is the immediate budget reallocation to prioritize debt reimbursement with the high interest rate.

3) The monthly debt that has finally been paid must be directed towards the repayment of a second debt written on your Excel spreadsheet.

4) Along the way and subject to good credit, debt consolidation should be considered. Obtaining a financial loan or line of credit at a better interest rate will allow you to accelerate paying off your various financial obligations, especially those with high interest rates, thus limiting the number of repayments coming from left and right.

5) An highly indebted person must consider all the possible solutions to rid himself of financial burden. Selling real estate property or personal goods, for example, can quickly bring to end a debt that weighs heavily on one’s budget.

6) Once the debt situation is controlled or is on its way to being resolved, it would be wise to partner up with a financial service professional. In the French text “Consult an advisor, it pays off” published by, the reader can take note of the words of Charles Sims, President of the Investment Funds of Canada, bringing attention to the “advisors who improve the financial knowledge of their clients, encouraging them to develop a savings and investment mentality, and assisting them in developing a financial plan,” he explains.

Ideally, no one wants to have a voluntary deposit, a consumer proposal, or worse, bankruptcy. A rude awakening partnered with quick action can often prevent one from losing the shirt off one’s back.

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