Credit is defined as time that
is given for payment of goods or services on trust. It is issued
by a creditor and can be used for a variety of purposes. Credit
is a convenience in that it allows you to enjoy a purchase while
paying for it however, normally there is a cost associated with
How does credit work?
The first step to using credit
is to apply for it. The consumer provides details of their financial
standing to a creditor who in turn issues a defined amount of credit
if the consumer is deemed suitable. The consumer can then use it
to make purchases upon which interest is usually charged. The consumer
is normally issued a statement at the same time each month which
provides details as to how much the consumer owes and must pay.
For example, with a vehicle such as a credit card, consumers are
often given the choice of paying off the total amount owing each
month or paying a specified amount, including interest, until the
whole amount is paid off.
Consumers are required to make their
payments in a timely manner, before the due date, to retain a healthy
credit rating. Dependent on the circumstances, once the credit has
been paid for, it is again made available to the consumer for use.
Who can apply for credit?
In Canada, you have to be over
the age of majority in the province in which you reside to apply
for a credit card. Be aware however that creditors look at things
like how much you earn in your employment and how long you have
been employed as well as your ability to repay any debts when deciding
who to extend it to.
How do I apply for credit?
The best way to apply for credit
is to fill out an application and send it to the appropriate creditor.
The creditor will review your application and decide whether credit
should be extended to you. While many different factors are considered
when creditors look at issuing credit, most focus on your ability
and willingness to repay your debts. Also, dependent on the circumstances,
they may also require some form of extra security from you to protect
them if you are unable to pay your loans. Basically, creditors look
at three issues: capacity, character and collateral.
Capacity - This deals mainly
with whether you can repay the debts that you incur. To judge
this, creditors look at your employment information such as your
occupation, what you earn and how long you have worked. Your expenses
will most likely also be considered including items like, the number
of dependents you have and the amount of child support or alimony
you pay, if any.
Character - This refers to whether
you will repay the debt. For this, creditors look at your
credit history through your credit report to discover things like
how much you presently owe, how often you have borrowed in the past,
whether your bills are paid on time and if you are living within
your means. In order for a creditor to issue credit, they must be
comfortable with your level of stability. This is demonstrated through
whether you own or rent your home, how long you have lived at your
present address and how long you have worked at your present place
Collateral - This considers
whether the creditor is fully protected if you fail to repay your
debts. They are interested to find out what items or resources you
have, besides income, that could be used to repay your debts. These
include property, savings and investments. They may also be interested
in what you may have that could be used to back up or secure a loan.
What is a credit rating?
A credit rating, or history is a record that is kept by a credit
bureau or reporting agency that details information about your borrowing
habits. It is a report on how reliable you have been in repaying
past debts and includes information on the amount of credit you
have already received. This information is supplied by lenders who
have supplied you with credit in the past.
How do I maintain my credit rating?
The best way to maintain a favourable
credit rating is to ensure that all payments are made on or before
the due date. It is also important to ensure that all mistakes and
errors are reported and fixed and that all misunderstandings are
cleared up as soon as possible.
Additionally, lost and stolen credit
cards should be reported immediately and you should always remain
up to date on the information contained in your credit rating record.
Your record information can be obtained by writing to the agency
that keeps your report. If you notice an error on your credit report,
notify the agency immediately to take the steps needed to have it
How do I obtain my credit report?
You can obtain your credit report
by contacting a credit bureau or reporting agency.
In Canada, the two main credit bureaus are Equifax Canada and Trans
Normally, to obtain a copy of your
credit file you must send a written request to the credit bureau
and include the following: a photocopy of two signed pieces of identification,
your complete current and former address, your date of birth, a
contact phone number during business hours and your social insurance
number (SIN). Also, in some cases, you may be able to have your
credit report sent to you by fax. Contact the credit bureaus directly
for detailed directions for obtaining your credit file.
When should I get a copy
of my credit report?
You should review the contents
of your credit report prior to making any large financial commitments
such as purchasing a new car or a home. This will allow you to avoid
any unpleasant surprises when attempting to apply for a mortgage
or a loan.
You should also check your credit file
for any mistakes or misrepresentations that may appear on it. Also,
if you have been turned down for credit, you can obtain the name
of the credit bureau that the credit lender has used to order your
report. If you feel that your credit report contains false information,
you can take steps to correct it at this point.
How is the cost of credit
The cost of credit can be determined
and compared by focusing on two terms: the annual percentage rate
(APR) and the finance charge.
The annual percentage rate (APR), the
key to comparing rates, is the cost of credit on a yearly basis,
shown as a percentage. Consumers should pay attention to the APR
regardless of the amount of credit or the length of the repayment
The finance charge is the total dollar
amount that you must pay to use credit which includes the cost of
interest, services charges and other credit-related costs.
All creditors are obliged to clearly
state both the finance charge and the annual percentage rate in
order to enable the consumer to compare rates.
What is open-end credit?
Open-end credit can be
used repeatedly until a prearranged limit is reached. This type
includes department store and bank issued credit cards, home equity
credit lines, overdraft bank accounts and fuel company cards to
name a few.
Keep in mind that with an open-end
credit plan, you are only charged the APR rate. It is important
that you determine both the monthly interest charge as well as the
APR before signing up for open-end credit. Also, remember that fees
for things like annual membership are not included in the APR.
Normally with open-end credit, the
creditor allows a grace period in which you have time to pay your
bill in full before a finance charge is applied. Creditors are required
to advise you of when finance charges will begin and must inform
you of the method used to determine the balance on which finance
charges must be paid.
What is a lease?
A lease is an agreement between a lessor (property owner) and a
lessee (property user) giving the lessee temporary rights to use
property for a certain amount of time. This agreement may be subject
to stated terms and conditions and involve specified payment terms.
Leases come in two basic types:
open-end and closed-end, and while the principal of leasing is similar
with both types, the rights and obligations of the lessee at the
end of the lease term are different. With both types of leases,
the monthly payment structure is determined, in part by estimating
what the value of the leased item will be at the end of the lease.
This value is also known as the residual value.
What is the difference
between an open-end and closed-end lease?
With both types of leases,
the residual value is determined at the beginning of the lease and
both contain use and wear specifications that must be maintained
throughout and met at the end of the lease.
In a closed-end lease, the residual
value is guaranteed by, and is the responsibility of the company
providing the lease upon it's maturity. With a open-end lease, the
lessee assumes responsibility for the residual value of the item
at the end of the lease.