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Understanding Credit

Last modified: 06 April 2016

Many consumers use credit to help manage their personal finances. Credit can be a mortgage to buy a house, a loan to buy a car, a line of credit for larger purchases or a credit card to make everyday purchases more convenient. It's important to understand how different types of credit work, and how to use credit to build a strong personal credit history. This section provides information on how a credit card transaction works, credit card products, budgeting, and avoiding money mishaps. Understanding credit is the key to using it wisely and making it work for you.

How a credit card transaction is processed

Credit cards are a convenient and simple way to pay for purchases and, when using a credit card, you are using a sophisticated and reliable worldwide payment system.  There are many benefits for consumers when using credit cards and for merchants when accepting them as payment, and all share the costs to the credit card system.

Check out the document, Understanding the Credit Card Transaction Process, for more information on how a credit card transaction is processed and the shared benefits and costs of this payment option. 

Using credit wisely

It is sometimes easy to pay for purchases on a credit card, but don’t forget that you have to pay for what you buy later. Here are some guidelines for keeping control of your financial affairs and making credit work for you, not against you.

  • Make a budget for yourself and stick to it. Make sure that you know what is coming in and what is going out. That way you will avoid nasty surprises on your credit card bill.
  • Avoid impulse buying. If you had to pay in cash, would you be making this purchase?
  • Comparison shop as a matter of habit. Never buy anything - and that includes any form of credit — without comparing costs and value.
  • Always read and understand credit application forms before you sign them.
  • Be careful when co-signing a loan or guaranteeing a loan on behalf of others. Remember that you could end up paying off the loan if the borrower cannot handle it. Ask the same questions of the borrower that the lender would. Know the risks involved so that you can make a sensible decision.
  • Be knowledgeable about the cost of credit. Are you using the right type for your purpose? Are you using a more expensive form of credit than necessary? For example, if you’re getting loans from a payday lender, talk to your bank. Banks have a variety of short-term loans that are much cheaper than payday loans, including lines of credit, overdraft protection and even credit cards.
  • Be sensible about the number of credit cards you use. How many do you really need? Are you using them simply because you have them?
  • Keep track of all your credit purchases. Save the receipts for checking against the monthly statements and for keeping a running total of your obligations. 
  • Remember, whether you use cash, a cheque, a card or a loan to pay for your purchases, to check out the reputation of the merchant, the store's return policies, the quality of the goods and the product warranty. Using credit to pay for something does not absolve you of your consumer responsibilities.
  • Read your credit card agreement to understand how interest is charged on your purchases, including the interest on cash advances. Typically, interest starts to accrue on cash advances the day you take out the cash. The Financial Consumer Agency of Canada has a video and an infographic on understanding cash advances.

Credit can be good or bad. It's all about how you handle it. Before you decide on credit, carefully consider all of the factors and weigh them against your personal needs and values. For additional information on credit products, please visit the Financial Consumer Agency of Canada’s website. For information specific to your bank, please visit your bank’s website.

 

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