C is for credit

Here's a list of 10 reliable sources of helpful information and advice on credit and debt.

1. Associations cooperatives d'économie familiale (ACEF) and Services budgétaires et communautaires offer budgeting courses at minimal cost and help people who have trouble managing their debts.
   • The Canadian Consumer Handbook website provides a list of consumer assistance organizations available in each province.
   • Coalition des associations de consommateurs du Québec (CACQ) comprises many ACEFs and Service budgétaires throughout Quebec. See the list of members (site in French only).
   • Union des consommateurs (site in French only) helps people dealing with credit issues.
2. Option consommateurs offers downloadable brochures on credit and mortgage financing:
   • Lumière sur le dossier de crédit (site in French only)
   • Lumière sur le financement hypothécaire (site in French only)
3. Coalition des associations de consommateurs du Québec offers a number of documents and questionnaires on the subject of credit, including:
   • La tentation du crédit (site in French only)
   • Crédit et endettement (site in French only)
4. Office de la protection du consommateur is a goldmine of information on your rights and responsibilities in the area of credit, including:
   • Courtiers en crédit (site in French only)
   • Recouvrement de dettes par une agence (site in French only)
5. Éducaloi is a website developed by the Quebec Bar, Chambre des notaires du Québec and Société québécoise d'information juridique that provides legal information on credit and other topics in simple, everyday language.
   • Buy now, pay later
   • Personal bankruptcy
   • Financial guarantees
6. Industry Canada's Office of Consumer Affairs has developed a one-stop online information source on how to manage debt.
   • Warning signs of debt
   • Avoid debt
   • Six Steps to Get Out of Debt
7. The Financial Consumer Agency of Canada website is packed with detailed information and practical advice on how to better manage credit and debt.
   • Credit cards
   • Credit card fraud
   • Your plan to be debt free
   • Rebuilding your credit
8. The Office of the Superintendent of Bankruptcy Canada supervises the administration of estates in bankruptcy, corporate reorganizations, consumer proposals and receiverships under the Bankruptcy and Insolvency Act. See the You Owe Money section for the following:
   • Dealing with Debt: A Consumer's Guide
   • You Owe Money—Your Options
9. Canada Mortgage and Housing is Canada's national housing agency. Its website provides tips for consumers who are having trouble making their mortgage payments:
   • Dealing with Mortgage Payment Difficulties

Variable credit granted in advance by a financial institution. The credit limit is determined by the lender based on the borrower's income and credit rating.

Consumers can use this type of credit whenever they need it without having to go through the process of applying for a loan.

Reimbursement and credit charges

To avoid credit charges, the loan must be paid off in its entirety by the end of each payment period, which is normally a month.

You can reimburse only part of the loan, in which case you have to pay the minimum amount in addition to credit charges.

Advantages

• Quick access to funds
• Safe
• Convenient
• Required for renting cars, hotel rooms, etc., and for online or telephone purchases
• Credit charges payable only when the balance is not paid in full
• Bonus point programs available with some cards

Disadvantages

• High interest rates
• Risk of building up debt if misused
• Can increase the borrower's debt ratio
• High credit charges when the balance is not paid in full each month

What is your credit rating?

A credit rating is the equivalent of a grade credit rating agencies give individual borrowers based on their repayment habits. You start establishing your creditworthiness and building your credit report as soon as you receive your first loan. Be careful, because your credit rating will follow you for the rest of your life.

The main credit rating agencies in Canada are Equifax Canada Inc. and TransUnion Canada.

Advantages of having a good credit rating

Good credit habits are important for a number of reasons:

• They help you maintain a good reputation with financial institutions.
• They make it easier to borrow large amounts to buy a car or a house, for example.
• They guarantee your financial freedom.
• They may allow you to obtain credit at favorable rates.

Consequences of a bad credit rating

Bad credit habits undermine your financial reputation, with the following consequences:

• You may have to pay higher interest rates on loans.
• You may need someone to endorse your loans.
• Your loan application may be denied.
• You might find it harder to get a job.
• You may have difficulty renting an apartment.

Borrowing costs refer to the interest you pay on your loan. The total cost of a purchase on credit is affected by 4 factors:

1. Initial amount of the loan
2. Interest rate
3. Repayment period
4. Payment frequency (e.g., weekly, biweekly, monthly)

A loan is more expensive when:

• the amount borrowed is high
• the interest rate is high
• the repayment period is long
• the payment frequency is low

Proof required to take out a loan

• Pay stub and most recent transcript, if applicable
• Proof of repayment capacity
• Any relevant information to show that you honour your commitments

Factors considered in evaluating the loan application

• Repayment capacity (or debt ratio)
• Credit rating
• Income stability

All consumers have the right to request their credit rating. In fact, you should check your credit report once a year to make sure it's accurate.

For more information

Visit the websites of Equifax Canada and TransUnion du Canada.

You start establishing your creditworthiness and building your credit report as soon as you take out your first loan. Your credit report contains all items in your credit history over the past 6 or 7 years used to determine your credit rating.

Lenders consult your credit report when deciding whether to grant or deny credit or a loan. They also consider your debt ratio, or your level of debt in relation to your gross or before-tax income.

Your debt level should not exceed 35% to 40% of your gross income.

Information in your credit report

• Name, address and date of birth
• Work experience: name of employer, job title, employment period, income
• Credit situation: late payments, unpaid debts, debt payment habits, available credit
• Information on public financial transactions: unpaid taxes, bankruptcies, legal rulings against you
• List of organizations or individuals who have requested information on your creditworthiness

Good habits that improve your credit report

• Repaying credit cards, loans and lines of credit on time each month
• Paying your credit card balance in full every month and avoiding interest charges

Bad habits that damage your credit report

• Writing bad cheques
• Submitting an empty envelope to an ATM
• Getting significantly behind in your payments
• Borrowing from a number of different financial institutions or building up a lot of personal debt

Who can ask to see your credit report

Credit rating agencies will send the information in your credit report to people or organizations authorized to request it. Authorization is generally granted during the loan or credit card application process.

Individuals and organizations authorized to check consumers' payment habits:

• Financial institutions, before granting loans
• Businesses, before selling something on credit
• Landloards, before renting out apartments
• Employers, before hiring
• Consumers, to check that the information in their credit reports is accurate

A loan is a sum of money lent by one individual or legal entity to another. The lender takes on a certain level of risk and may require the borrower to pay interest that reflects that risk. The borrower must repay the entire loan plus interest, if applicable, according to the terms of the loan contract (term, monthly payments, interest rate, etc.).

There are many types of lenders:

1. Friends and family

   Also called love money, this type of credit is often used by young adults.

   Advantages
   • Ability to negotiate the interest to be paid
   • Flexible repayment terms
   Risk
   • Damaged personal relationship with the lender, especially if the borrower has a problem repaying the loan
2. Financial institutions

   Financial institutions are the traditional source of credit, which can be in the form of personal loans, mortgages, lines of credit or credit cards.

   Advantages
   • Personalized business relations based on the borrower's needs
   • A necessary step in establishing a good credit rating
   • Interest rates adapted to various situations (student loans, mortgages)
   Risks
   • Interest rates vary based on borrower's credit history.
   • The financial institution may require a cosigner.
   • A cosigner is required to pay back the loan if the borrower is unable to do so.
   • Failure to repay a loan will tarnish your credit rating.
3. Retail stores

   Many stores and retail outlets offer their own credit card to customers who buy their products. Some stores also offer financing plans such as the ability to pay in monthly instalments or at a later date.

   Advantage
   • Ability to make a purchase more quickly
   Risk
   • Interest rates are generally higher than those for an ordinary credit card
4. Loan or mortgage companies

   Companies that specialize in granting loans to consumers who have been declined by other, traditional sources of credit.

   Advantage
   • Allows consumers to buy a required item such as a car, despite a bad credit rating
   Risk
   • Interest rates are often very high
5. Yourself

   Some people are able to borrow from their own investments or insurance policy.

   Advantage
   • Very good springboard for buying a house
   Risk
   • Loss of income from the borrowed funds
6. Pawnbrokers

   Pawnbrokers operate retail outlets (often called pawnshops) where you can obtain a loan in exchange for a pawned item.

   Advantage
   • None
   Risk
   • A potentially very expensive source of credit

Variable credit granted in advance by a financial institution. The credit limit is determined by the lender based on the borrower's income and credit report. Consumers can use this type of credit whenever they need it without having to go through the process of applying for a loan.

Reimbursement and credit charges

To avoid credit charges, the loan must be paid off in its entirety by the end of each payment period, which is normally a month.

You can reimburse only part of the loan, in which case you have to pay the minimum amount in addition to credit charges.

• Interest is charged only when the line of credit is used.

• High interest rates
• Can increase the borrower's debt ratio

The type of financing is based on the lifespan of the item you buy. The amortization (payback) period corresponds to the length of time the purchased item will be used.

Financing can be short term, medium term or long term.

Short term

Short-term financing refers to credit granted for a term (payback period) of less than 2 years. Interest rates are generally higher than for longer-term credit. Lines of credit and credit cards are used for short-term financing needs such as emergency purchases, unexpected events or regular expenses. To avoid credit charges, you must repay the loan in full by the end of each payment period, which is generally a month.

Medium term

Medium-term financing refers to credit granted for a term of 2 to 7 years for purchasing items such as a car, furniture and so on. Interest rates are generally lower than for short-term financing. Payments and borrowing costs are known in advance and set by the financial institution.

Long term

Long-term financing refers to credit granted for a term of 7 to 25 years for buying major items such as a house. Interest rates are usually lower than for medium-term financing. Payments and borrowing costs are known in advance and set by the financial institution.

The use of credit is becoming increasingly common, largely due to rising salaries and prices and easier access to credit.

Main reasons for using credit

1. Achieving your goals: buying a house or car, travelling, paying tuition fees, etc.
2. Booking or renting goods and services: you need a credit card to book tickets to a show or rent a car
3. Paying for unexpected expenses: when an unforeseen event leads to expenses that are not covered in your budget
4. Using credit as a springboard: for investing or seizing an opportunity when your savings are not enough
5. Consolidating your debts: covering all your debts with a single loan, often at a more favourable rate

Useful debts and debt overload

Some debts can be useful for building a good credit report.

Examples of useful debts:

• Mortgage
• Line of credit
• Auto loan
• Student loan
• RRSP loan

Causes of debt overload:

• Taking out loans that do not fit your budget
• Carrying an unpaid credit card balance
• Having multiple credit cards