Borrowing now, paying later
Credit lets you buy something now and pay later. When you use credit, you take on debt: money you owe.
Credit is a tool. Used wisely, it helps you buy a home, pay for school or handle emergencies. Used carelessly, interest can make debt grow quickly.
Types of credit
| Type | How it works | Example |
|---|---|---|
| Credit card | revolving: borrow and repay up to a limit | everyday purchases |
| Line of credit | borrow as needed up to a limit, usually lower interest | home repairs |
| Instalment loan | fixed amount repaid in regular payments | car loan, student loan |
| Mortgage | long-term loan secured by a home | buying a house |
| Buy now, pay later | split a purchase into instalments | online shopping |
The cost of credit
The interest rate decides how much borrowing costs.
| Credit | Typical interest rates |
|---|---|
| Mortgage | about 4–7% |
| Car loan | about 5–10% |
| Line of credit | about 7–12% |
| Credit card | about 20–30% |
| Payday loan | very high, often equivalent to several hundred percent a year |
Example: $2,000 on a credit card at 20% per year, unpaid for a year, costs about $400 in interest.
Good debt vs bad debt
- Good debt may build value: education, a home, tools for a business.
- High-interest debt for things that lose value quickly (impulse purchases, vacations on a credit card) is usually considered bad debt.
Your credit score
In Canada, a credit score ranges from 300 to 900. Higher is better. Lenders use it to decide whether to lend and at what rate.
| Factor | Effect |
|---|---|
| Paying bills on time | the biggest factor |
| Credit used vs available | using less than about 30% of your limit helps |
| Length of credit history | longer is better |
| New applications | many in a short time can lower your score |
| Mix of credit types | a mix can help a little |
Your credit report is kept by credit bureaus (Equifax and TransUnion in Canada). You can request it for free.
The debt trap
Paying only the minimum on a credit card can take years and cost a lot. If debt grows faster than you can pay, talk to the lender or a non-profit credit counsellor early.
Worked examples
Example 1: A $1,500 limit with a $600 balance. Utilization? 600 ÷ 1,500 = 40% (higher than the suggested 30%).
Example 2: A $10,000 car loan at 6% simple interest for 3 years. Interest? $1,800.
Example 3: Which hurts a credit score more: a late payment or checking your own score? A late payment (checking your own score doesn’t affect it).
Common mistakes
- Missing payments, which damages your score.
- Using credit cards for money you don’t have.
- Taking payday loans, which are extremely costly.
Try it yourself
- Range of Canadian credit scores?
- $3,000 limit; keep usage under 30%. Maximum balance?
- Name two types of credit.
- What is the most important factor in a credit score?
Answers: 1) 300–900 2) $900 3) e.g. credit card, car loan 4) paying on time
Quick recap
- Credit creates debt that must be repaid with interest.
- Compare interest rates; credit cards are costly.
- Protect your credit score by paying on time and borrowing carefully.