Credit

Credit Script, Activity, and FAQ

Slides for the script can be accessed here.

Introduction

  1. Introduce yourself (name, background) and the topic for the session today (credit)
  2. Introduce the topics for today related to credit

 

Topic 1 - Debit vs. Credit 

  • We will first explore the difference between debit cards and credit cards
  • A debit card draws directly from your bank account (in most of the case, the chequing account) when you make a purchase
  • Note that the funds are IMMEDIATELY withdrawn from your account with a debit card
  • A credit card allows you to borrow money in small amounts when you make a purchase because you do not have to pay back the purchase amount right away
  • This allows the card to act like an I.O.U (I owe you), where you must pay back the amount on the credit card from you chequing account
  • If the purchase amount is not paid off in (usually) 30 days, you will have to pay interest on the purchase

Both cards are physical cards issues by a commercial bank:

  1. Represent an alternative way to pay (instead of cash)
  2. The cards allow you to transfer money electronically between stores or other banks
  3. Setting up accounts at the banks allows you to use other features like e-transfers and mobile banking

Credit Cards

Important because they help you build a credit history. If you have difficulties obtaining a credit card, you can obtain a secured credit card at your bank. This acts like a credit card, but with some additional requirements the holder must include to obtain the card

Some of the requirements may include:

  • You depositing a sum of money with a credit card issuer
  • There is a credit limit set to a percentage of your deposit

You may transfer to a conventional credit card once your credit history is satisfactory

 

Topic 2 - credit scoreS

Now, we will explore the importance of credit scores and the effects it has on your credit.

Definition: A credit score is basically a judgement about your financial health at a specific point in time. It is a number that summarizes how well you use your credit

To a lender, it indicates the risk you represent compared to others.

Scores range between 300 and 900 points, where 900 is a perfect score

The credit score is used in a variety of ways, including:

  • Influencing how much the interest rate you pay when you borrow
  • Sets up the limit of credit you have with the banks (ie. loans, credit cards)
  • Banks use it to consider for approving your loans (ie. for mortgages)
  • And it can influence how much you pay for your insurance in certain provinces

It’s also important  to know what factors influence your credit scores:

  1. One factor is your payment history. This is how often and in what amount you pay your amounts due. A missed payment will negatively influence your credit score
  2. The amount of debt you have outstanding will also affect your credit score. The more debt you have due, the less likely you will be able to get a new loan, and the lower your score
  3. The last factor is your account history, that is how long you’ve had credit. The longer you’ve had credit, the higher your score will most likely be

The next thing  I want to talk about is the credit report. The report is basically a combination of your information as affecting your credit history. The specific time frame varies depending on the type of information in the credit history, province, or credit bureau

Some examples are:

  • Negative information about credit cards and loans will stay on your profile for 6 years
  • Credit checks by lenders, like Equifax, will stay on your profile for 3 years
  • Bankruptcy will stay on your profile for 6 to 7 years

Maintaining Good Credit History

Now that you have a good understanding of what credit history is, let’s take a look at how to maintain a good credit history

  1. Pay your bills on time
  2. Try to pay your bills in full by the due date. If aren’t able to do this, pay at least the minimum amount shown on your monthly statement
  3. Contact your creditors (lenders)  if you’re having trouble making payments
  4. Ask if you can make special arrangements to pay iiff the debt
  5. Make sure that your monthly account statement is correct
  6. Read the statements and other material you received from your credit card company. Keep up to date of any fee changes
  7. Deal with companies you know and trust

Credit Activity

True or False: When it comes to credit scores, the lower the number the better?

  • False. The higher the credit score, the better
  • 900 is a perfect score

True or False: To build a credit history, you should apply for every type of credit card you can get your hands on.

  • False. To build a credit history, you need to use different types of credit over time. However, you should not apply for too many sources of credit within a short period of time.

True or False: A debit card does not allow you to build up your credit history.

  • True. A credit card allows you to build up your credit history. A debit card only acts as an access card to your bank account, where funds are deducted right away when you make a purchase.

Missed payments generally stay on your credit report:

  • For 1 year
  • For up to 7 years
  • Forever
  • As long as the banks indicates

What are some advantages of using a credit card?

  • Building up your credit history
  • Maintaining a good credit history allows you to:
    • Borrow at a lower rate of interest
    • Borrow at larger amounts or for longer periods
    • Lease cars
    • Positive background checks - ie. for jobs or house rentals

 

Q&A

1. What does a credit report include? It can include your credit cards and loans, mobile phone account, and your mortgage.

2. Do you have to pay to order your credit report? You do not have to pay when you order your credit report by mail or phone. You do have to pay to get your credit report instantly online, and you usually have to pay to get your credit score.

3. What should you do when you cannot make a payment? Try to make at least the minimum required payment amount by the due date. You should also contact the lender, and try to make special arrangements to pay down the debt if possible. Note that the interest is based on the principal amount outstanding. Simply paying down your interest may still result in interest due if there is a principal amount outstanding.

4. Where should I start if I want to recover my credit history? Take an account of the amounts outstanding and budget payment schedules. Paying down higher interest dues may be suggested, but do keep in mind the payment due dates. Talking with a financial advisor can also be helpful to discuss specific financial situations.

5. Does the credit score of my business affect my credit score in the event of a bankruptcy? If the business is a sole-proprietorship, bankruptcy will affect your credit score. If the business is in the form of a corporation (ie. it is a third-party or you own shares of a company and the company goes bankrupt), the bankruptcy will not affect your credit score.