Whether you are in the workforce or a stay at home mom, it is important to understand credit, the different types available and how to build credit in case you may need it. Credit is the ability to obtain goods or services before an actual payment is made, based on the commitment that the payment will be made at a future date.
When applying for credit there are 2 types: secured and unsecured. Secured credit is based on, or secured by, an asset (e.g. a property or car) and used as collateral security for the debt. If the borrower does not pay back the debt according to the agreed upon terms, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower. Common examples of this are a home foreclosure or a car repossession.
The opposite of secured credit is unsecured credit. This type of credit is not connected to any assets or collateral security but to the borrower herself. In this case if the borrower does not pay back the debt according to the agreed upon terms the creditor may only satisfy the debt against the borrower. Often secured credit may attract lower interest rates than unsecured credit due to the added security for the lender, however, ability to repay, credit history, and expected returns for the lender are also factors affecting how much it may cost you to borrow this money which is called interest.
Nowadays people are regularly pulling out their credit cards to make daily purchases so it is essential to educate yourself on how this may effect you. Recently it has been said that Canadians are spending about $1.50 for every $1.00 earned and not on things that may appreciate in value. Credit cards, most often of which are unsecured, can be a terrific tool to help manage your money over the month as well as build a positive credit rating but there is one big trick. You must be able to pay off the full amount of the balance owing by the due date or else you are costing yourself money in interest payments every month, as well as decreasing your future buying power and potentially going further into debt. Even if you can’t pay back the full amount owing on your credit card, it is best to pay back as much as you can as quickly as you can. Or better yet, if you do not have the money to pay in full by the due date then don’t buy the item until you do!
If none of your bills, loans or credit cards are not solely in your name then it’s time to put yourself on the map and build a good credit rating. If you are not earning an income it can be more difficult to get credit. You may consider applying for a credit card at a department store you shop at regularly or speak to the bank you are currently using.
Before you begin to improve your credit rating you’ll need to find out your own score. You can get a “free report by mail” from TransUnion or Equifax, the 2 main credit bureaus in Canada. Creditors call your credit score a “Beacon Score”. If you request your credit report online, it will reference your score as a “Fico Score” – these are the same numbers. Credit score ranges from R all the way up to 900. An “R” credit score stands for “Reject” and appears immediately after someone files for bankruptcy. It becomes a number after one has been discharged from bankruptcy. 900 represents the best possible score. The majority of people have a credit score in the 700’s. Below 600 is considered “bad” credit. You need a minimum credit score of 680 to qualify for a mortgage with a major bank.
Besides making sure you make timely payments in full, here are 5 things to avoid because they reduce your credit score:
1) Too much debt
2) Inquiries- the number of times you apply for credit in a single calendar year impacts your credit score. Keep in mind that when opening an account or applying for utilities or insurance, if you are asked for permission to pull your credit, it will count as an inquiry.
3) Too many new accounts-obtaining a number of credit cards at the same time
4) Too many accounts altogether- even if you don’t owe money to all of them.
5) Credit balances too high in proportion to credit limit. Even if you pay your credit card in full each month, never run a balance that is more than 75% of your credit limit.
Begin to build a positive credit history so when you need to borrow money you will qualify for the lowest interest rates. Your credit score is one component of your overall financial health. It’s time to start setting yourself up for the possibility of obtaining credit before you find yourself in a situation where you just might need it.
Klein is a certified BIA Credit Counsellor. She runs DebtCare Canada’s
rehabilitation program and helps clients plan to build a brighter
financial future by assisting them in finding a financial balance and
budget in their lives. At DebtCare Canada Jillian helps clients regain
control of their finances and learn how to live debt free.