You can use credit to purchase something and use it immediately while you pay it off over time. If you want to buy on credit or get a credit card, it is important to consider the interest rate and the effect it can have on your credit history. Be sure to think about how you will pay it back and what it will cost to borrow before you buy or sign up.
What is credit?
Credit can be a loan, an overdraft, a line of credit, or a credit card. It’s an agreement between you and a financial institution or a store about how much money you can borrow and what the process will cost you. Make sure you read the fine print on contracts and purchases.
What is interest?
Interest is the charge that you will need to pay to borrow money. It is usually a percentage (interest rate) decided by the lender and is in addition to the cost of whatever you purchase.
Interest will be added to your outstanding balance until you pay the money back in full. The rates depend on your credit history and who the lender is, and can range from 5.6% to as high as 29.9%. Make sure you add the cost of interest to your purchase price before you decide to use credit.
The longer you take to pay the borrowed money back, the more likely that a large portion of your monthly payment will go toward interest.
Pay day loans have extremely high interest rates. Some can be over 500% annually!
What is my credit history?
Credit companies keep a record of your history when you get a loan or a credit card – this is what is referred to as your Credit History. If you apply for a loan or credit card, paid monthly bills, or had a cell phone plan, you have a credit history.
Your credit history shows your ability to make payments on time and keep your agreements. The history also keeps information about your employers and where you live or how many times you have moved.
Your credit history has an impact on the interest rate that a financial institution charges you to borrow money. If you pay your bills on time, even if it’s the minimum amount due, and do not owe a lot of money, lenders will offer lower interest rates in the future. If you miss payments or owe a lot of money, you become a greater risk for lenders and will be charged much higher interest rates.
Landlords and employers may check your credit history prior to making their decisions.
How do I find out my Credit History?
You can request a credit history report once a year from Equifax and TransUnion, the agencies that track credit histories. Once per year, you can access a free credit report.
- TransUnion's Online Consumer Disclosure website allows you to download your report for free, and also provides info for their offices if you'd like to go in person. You can also call them at 1-800-663-9980.
- Equifax Canada will send you a report for free if you send a written request with photocopies of ID in the mail. Download the form here. You can also access it online instantly for a fee. Their number is 1-800-465-7166.
Should I borrow?
Think things through before you take on debt or purchase on credit. Some loans are definitely worth the repayment costs – student loans (usually lower interest rates and longer term repayment options) and car loans (you build equity in the car you will own) are good examples. For smaller purchases, consider your budget and add to your savings until you have the money to purchase the item you want. Your credit history will always follow you – treat it with great care!