How Much Debt Is “Normal”?

How to Determine If Your Debt Load is Too High

Whether you’ve recently acquired debt, or you’ve noticed that your debt load is starting to creep up and it is causing some anxiety, you may be wondering, ‘Is this normal?’

While there are averages across the board, there is in fact a quote-on-quote “normal” amount of debt that you should be aiming for. So what is this “normal” debt? We’ll help you figure it out.

How Much Debt Does the Average Canadian Have?

If you’re worried you have too much debt compared to others, consider the fact that, collectively, Canadians owe a whopping $2.16 trillion. And the average Canadian owes $1.70 for every dollar they earn annually after taxes.

In fact, only 24% of Canadians are debt-free, according to a survey done by the Angus Reid Institute.

So, don’t start panicking about your own debt load just yet, because as these numbers show, you are not alone, and there are solutions.

Where the Majority of Debt Comes From

So where is all this debt coming from?

The survey found that most Canadians’ debt loads are comprised of the following:

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  • Credit cards
  • Mortgages
  • Lines of credit
  • Student loans
  • Car and other loans


How Much Debt is Too Much? What is Considered Manageable?

While you may feel some anxiety when thinking about how much debt you owe, that doesn’t necessarily mean it is excessive and out of hand.

If you can make all minimum payments, and not max out any of your credit cards while still being able to afford your basic necessities and have some extra income left over, these are good indications that your debt load is completely manageable.

On the other hand, here are some signs that your debt load has become unmanageable:

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  • You have multiple credit cards that all hold high balances
  • You have maxed out some, or all your credit cards
  • You can’t afford minimum payments
  • You are forced to take cash advances on one credit card to pay off other cards, loans or bills
  • You have taken out payday loans
  • You are avoiding opening your mail or answering calls from collection agencies
  • A creditor has garnished your wages or frozen your bank account
  • Your financial situation is causing a great deal of stress and keeping you up at night


The 28/36 Rule

While these are all great indications how manageable your debt is, there is a better, more mathematical way to find out if your debt load is in fact “normal.”

This is where the 28/36 rule comes in.

The 28/36 rule is a guideline for calculating the right amount of debt that an individual or household should have.

According to this rule, a household should spend a maximum of 28% of its gross monthly income on housing expenses and 36% on debt payments. The 36% is in itself a high ratio of debt.

This rule is important, as it is used by mortgage lenders and other creditors when assessing your borrowing capacity. If your debt exceeds the 36% threshold, lenders will consider you a higher risk for defaulting on your payments.

Why Having Some Debt is Actually A Good Thing

While having debt is often considered a bad thing, that isn’t necessarily true. There is a big distinction between good debt and bad debt that is important to understand.

Good debt includes:

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  • Student loans
  • Mortgages
  • Home equity lines of credit
  • Small business loans


The reason why these are all considered good debts is because they have the potential to help you generate income and increase your net worth.

Bad debt, on the other hand, does not help increase your net worth and is considered particularly bad if you borrowed money to purchase depreciating assets. This includes:

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  • Credit cards
  • Payday loans
  • Car loans
  • Personal loans for discretionary purchases
  • CRA income tax arrears


Tips to Help Reduce Your Debt

Once you’ve entered the debt cycle, breaking out can be difficult. But it doesn’t have to be. Here are some tips to help you reduce or eliminate your debt altogether.

Do Not Create Any More Debt

When tackling a big pile of debt, one of the most important things you can do is avoid taking on any additional debt, and focus solely on paying off your existing debt.

This means not using your credit cards and not taking out any new loans.

Increase Your Monthly Payments

When you are just making the minimum payments, it can be incredibly difficult and time consuming to pay down a large amount of debt when you are accumulating interest. In fact, if you make just minimum credit card payments, it may take 25 years, or more, to pay the debt off. Look on the back of your statements to see how long it will take.

If you are serious about reducing your debt, you are going to need to start making larger payments beyond just the minimum.

The best thing you can do is pay as much as you possibly can each month while still being able to afford your very basic necessities like rent, mortgage payments, utilities, food, and transportation.

Focus on One Major Debt at A Time

Another way to effectively cut down your debt is to focus on one debt at a time. Still make the minimum payments on your other debts, but make larger, more significant payments, on just one debt until it is paid off. Then do the same with another. This will help you make more noticeable progress much more quickly. Focus too on the debt with the highest interest rate.

Credit Counselling

If the mere thought of getting your debt under control is overwhelming and causing you anxiety, try meeting with a professional debt counsellor or Licensed Insolvency Trustee (LIT).

Credit counselling can help teach you how to take control of your finances and come up with effective strategies to manage and reduce your debt.

Consumer Proposal

If you find yourself in a severe debt crisis, you are struggling to keep up with even the minimum payments, and, possibly, your income has been garnished, speak to a LIT to see if you are eligible to file a consumer proposal.

A consumer proposal is a debt relief solution that allows you to avoid personal bankruptcy, negotiate a settlement with your unsecured creditors, and get legal protection from your creditors and their debt collection agents.

A consumer proposal will allow you to partially repay your total unsecured debt with zero interest over a specified timeframe. The balance of the unpaid debt is forgiven by your creditors.

You will be required to work with a LIT who will be the administrator of the consumer proposal. The LIT will stop creditor collections, assist you in drafting a budget and the consumer proposal payment plan, and negotiate with the creditors on your behalf. They have unique statutory powers to assist and help you. As highly trained and regulated professionals, you can count on them to be ethical, honest and very capable in resolving debt.

Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee. Its professionals have assisted thousands of individuals successfully resolve their debt crises and overcome financial turmoil since 2002. Its passion – its mission – is your health and well-being!