An illustration of three credit cards melting. A visual metaphor of what it feels like when you're overwhelmed by debt.

Here are the warning signs that you have too much debt

Debt can be a great thing. It can help you buy something you want that you might not otherwise be able to afford — like a house, car or even an education.

Used responsibly, debt can help you build wealth. But many people find themselves overwhelmed by debt. Maybe you bought a sports car that was way above your budget. Or maybe you’ve fallen ill and can no longer work.

Whatever the cause, it’s important to identify early when your debt has become too much to handle. And doing that means recognizing the warning signs.


What to watch out for


According to the Licensed Insolvency Trustees at Hoyes, Michalos & Associates Inc., there are five early warnings signs that you’re on your way to being unable to pay your debt.

The first sign that you’re headed for danger is that you’re using credit for necessities, which indicates you’re struggling to make ends meet and likely living paycheque to paycheque, with the credit card acting as a stopgap solution.

Another warning sign is rolling over your credit into new credit. If you’re buying a new car and bringing the debt you had on the old car with you, that creates the danger that you’re perpetually adding to your debts rather than paying them off.

Only making the minimum payments is another red flag, as is using products like cash advances and payday loans, which come with astronomical interest rates.

Finally, if you regularly use overdraft protection on your bank account, that’s a warning sign you’re dealing with too much debt.


So what are you supposed to do?


First of all, it’s important to know your financial situation. Start by creating a budget, and find out where your monthly income is spent. How much do you spend on housing? On groceries?

The most important question is how much goes toward debt. The Credit Counselling Society recommends that you should spend no more than 5-15% of your monthly income on debt repayment.

If you’re north of that, look at your budget to find out where you can reduce spending to make additional payments toward your debt.

Now, if you’re already past the point of being able to service your debts with existing income (e.g. your debts are growing faster than you can pay them off and collectors are calling about missed payments) then you need to speak to a Licensed Insolvency Trustee — which is an official designation granted by the federal government — to figure out your options. Debt counsellors without this designation should be avoided.

One option may be bankruptcy, which will stop collections actions, and also give you a fresh start from your previous debt. This, however, has a serious impact on your credit score. Alternatively, you may be recommended a consumer proposal, where you make a plan to pay back a portion of your debt, while the rest is forgiven. This will also impact your credit score.

Of course, as mentioned, it’s important to speak to a Licensed Insolvency Trustee before undergoing any of this — they’ll lay out your best options for you.