President's Choice Financial|helpful stuff|financial wellness|borrowing & credit

understanding credit

Many people look back to the day they got their first credit card as a momentous occasion, even a coming of age. What a thrill to pull out your wallet at the end of a nice restaurant meal and give your credit card to the waiter. That said, the thrill quickly passed — in about the time it took for your credit card statement to come in the mail.

The point is, most of us rely on credit at some time or another to buy products or services today and pay for them at a later date. And examples of types of credit vary greatly, from taking out a mortgage to finance your new house, to putting your groceries on your credit card, to using your line of credit to pay for your home renovations.

When you use credit to purchase something today and pay for it later, you're usually required to pay interest and/or service charges on the amount of money the creditor (for example, the bank or credit card company) advances to you. To protect your credit rating — the measure of how dependable you are in paying back your debts — it's crucial for you to repay the amount originally advanced to you and all accumulated interest according to the creditor's payment terms.

Here are some tips for making your credit work for you — instead of the other way around:

Make your bill, credit card, and line of credit payments on time. That way, you can avoid incurring additional fees and damaging your credit rating.
In the same vein, don't give in to paying only the "minimum amount due". By paying as much of your bill as you can afford, you'll reduce the amount of interest you owe.
Understand the costs associated with credit. Are you using the right type of credit for your purpose? Or is there a less expensive alternative?
Don't buy on impulse. Instead, use credit to finance purchases you've planned in advance.
Keep track of the amount you're putting on credit throughout the month. Purchases can add up quickly, leaving you with a higher bill than you may have originally anticipated.
Don't apply for more credit cards than you need simply because you keep getting offers in the mail. Chances are, you'll likely end up using them more often than you really need to — which could also affect your credit rating.

By becoming aware of the ins and outs of using credit to pay for your purchases, you'll be in a better position to use your credit cards and lines of credit responsibly — and hopefully develop an enviable credit rating in the process!

helpful tools and information

Financial Consumer Agency of Canada