A closer look into credit and what it means for you

A closer look into credit and what it means for you

Ashley bought a new car!

 During the month of June both Ashley’s car and her fiancé’s truck broke down. After experiencing a mini-meltdown, both decided it was time to just buy something new. They did have some money stored away for a rainy day. Their savings, however, were not enough to pay for a new vehicle and since being stranded all summer is no fun – they had to finance. While they feel they got a really good deal – credit is debt. If you don’t wind up with 0% financing you can end up paying a whole lot more than you expected.

The trick is to understand what you are getting into with credit. Educate yourself, whether it is through your bank or your mortgage broker, they can give you the advice you need.

Types of Credit

  • Credit cards
  • Cash secured credit cards
  • Personal lines of credit
  • Personal loans
  • Student loans
  • Installment plans
  • Overdrafts
  • Buy-now-pay-later store/product offers

First and foremost figure out who you want to deal with. If you like what they have to offer, find out what their rates are and how they compare. Do they have your best interests in mind? Think about the amount of debt you will be getting yourself into – can you handle it?

Credit Ratings

Every time you pay a bill, charge your credit card or take out a loan, Canada’s credit bureau is keeping track. Your credit rating determines your ability to get credit. It is fairly easy to maintain a good credit rating as long as you manage your money and follow these tips:

  • Pay all of your bills on time
  • Pay off debts as quickly as possible
  • Avoid prolonged low monthly payments
  • Establish your credit with well-known, trustworthy institutions
  • Understand your contract and calculate the total cost of your purchase over time with interest

You can get a free credit report from either Equifax or TransUnion.

Credit Ability – The 3C’s

Most institutions have these guidelines in place to determine your ability to get credit:

  • Character – It shows if you have a good record of paying back your debts.  Have you shown responsibility in handling your finances in the past? Do you make payments on time? Is your credit report good?
  • Capacity – It shows your past, present and future ability to pay back debt and meet your financial obligations. What is your income? Do you have a secure job?  How much debt do owe right now?
  • Collateral – It shows what you own in the form of assets (for example, a car) and how the value of what you own compares to the value of the credit you want.  Do you have enough stuff of value to pledge as security for a loan?

Warning Signs

Be aware of the risks associated with mismanaging your debt and letting your credit spiral out of control. Some risky behaviour includes:

  • Using credit because you don’t have cash
  • Paying only the monthly minimum payment
  • Stalling one creditor to pay another
  • Charging more than the monthly amount you pay on your accounts
  • Using a cash advance from one creditor to pay another creditor
  • Applying for a second Visa or Mastercard at another branch
  • Requesting an increase on spending limits on credit cards, overdrafts, etc
  • Taking add-on loans or consolidation loans while continuing to use your credit cards
  • Borrowing from a friend or family member just to make ends meet each month

If you have any questions or comments for Ashley, please leave them in the comment box below!

 

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