Understanding credit

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There was a time when newcomers to Canada practically had to buy their first credit card. They had to prove their credit-worthiness before banks would approve their applications. But nowadays, most major banks have newcomer welcome programs that help new Manitobans open a bank account and avail of a credit card.

But why do you need a credit card? For starters, having one is a convenient way to pay for your purchases without carrying cash. It also allows you to pay for or buy an immediate need you don’t have money for at the moment and pay for it later. But more importantly, credit card use establishes your credit history. Credit history is “a record of a consumer’s ability to repay debts and demonstrated responsibility in repaying debts” (Investopedia). It is a documentation of a person’s credit accounts, details of bill payments, and how he or she uses money to deal with loans and credits (borrowing habits).

And why is this important? Your credit history will be reviewed when you apply for other credit, such as loans and mortgages. Some landlords also check credit history when you are applying to rent a house, and employers when you are applying for a job. To know more about the components of your credit history, read Understanding your credit history.

The dangers of credit

While a credit card and access to loans are good to have when you are just starting to establish your new life in Canada, be careful not to go overboard with debt. The most important thing to realize is that your credit limit is not free money. Anything you borrow, you will need to return, and usually, with added interest (especially if you don’t pay on time). Because they are so easy to use, credit cards can lead you down a slippery slope of debt, which can be hard to get out of. So always regard credit as a big responsibility.

The following video from the Financial Consumer Agency of Canada will give you information on the following:

  • Types of credit
  • Credit report and credit scores
  • Credit reporting agencies
  • Tips to avoid problems
  • Interactive tools

Important terms to know:

  • Annual interest rate – refers to the annual interest rate charged on transactions when you don’t pay your balance in full. Credit card issuers can charge different interest rates for different types of transactions, such as balance transfers, cash advances and purchases.
  • Bank rate – is the minimum lending rate of the Bank of Canada. The bank rate is an important tool because it is seen as the trend-setter for other short-term interest rates. Changes in the bank rate often lead to changes in the prime rate, which is the rate of interest that commercial banks charge their lowest-risk customers. Other rates can be affected by changes in bank rates, including those for mortgages, cars and business loans, as well as rates paid to savers on deposits and investment certificates.
  • Cash advance – cash obtained from an automated banking machine (ABM) or teller, charged to your credit card. A cash advance is a loan, and the amount you borrow may be subject to daily limits. There is no interest-free period, so interest is charged from the day you withdraw the funds until the day you repay the amount of the advance in full. It is, therefore, an expensive way to obtain cash.
  • Credit limit – the maximum amount a credit card company will allow someone to borrow on a single card. This is based on information on a person’s application for credit and their credit rating (Investopedia).
  • Due date – date on which you must make your payment. If you pay beyond the due date, you may be subject to interest.
  • Interest-free grace period – A number of days during which no interest is charged on the transaction. By law, all federally regulated financial institutions that issue credit cards must provide a minimum 21-day interest-free grace period on all new credit card purchases, as long as the balance is paid in full by the credit card statement’s due date. NOTE: There is no interest-free grace period for cash advances, cash-like transactions or balance transfers.
  • Late payment fee – bills not paid on time can incur additional charges. This additional charge could be a percentage of the monthly interest charges.
  • Minimum payment – the minimum payment your credit card issuer requires you to pay on the outstanding card balance.
  • Mortgage– A loan (usually for buying a property) in which the lender can take possession of the property if the loan is not repaid on time. Payments include the principal and the interest; it could also include a portion of the property taxes.
  • Rewards – every time you use your credit card and reach a certain amount, you may earn points which you can receive as “cash back” or credit for certain purchases or merchandise. There are different types of rewards credit cards, with varying features, benefits, annual fees and interest rates.

(Definitions taken from the FCAC glossary and Investopedia)

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Community Resources

Aside from the Credit card selector tool to help you choose the credit card that’s right for you and the Credit card payment calculator mentioned in the video, the FCAC also has other interactive tools such as Mortgage Calculators, Budget Calculator, and the Bank Account Selector tool.

There are many financial literacy programs in Manitoba that can provide you with proper guidance in handling your finances. Community Financial Counselling Services offers free workshops as well as great tips on their website. SEED Winnipeg conducts Manage your Money workshops (for low-income groups composed of seven people or more) and offers various asset-building programs for low-income groups and newcomers.

For more information about money and finances, go to the Canadian Financial Literacy Database on the FCAC site, or to the Financial Literacy Resource Website at Manitoba.ca.

Also read Credit cards: 10 things you need to know by Ellen Roseman for the Toronto Star.

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Quiz

Understanding credit

For questions 1 – 5, select the correction definition for each word as used in the article. For questions 6-10, select the best answer for each question.

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