Credit Contracts

Credit is one way of paying for all kinds of projects: education, car, house. When it comes to borrowing money, there are several financing options available to you. Variable credit, money loans and instalment payments are all types of credit contracts with features that you should be familiar with before signing on. 

You should also know that a credit application very often involves interest, expressed as a percentage or interest rate, and added to the amount of the loan that a credit issuer, lender or creditor grants you. A high interest rate can add to your costs, so consider this carefully when planning your budget.

Remember: talking to a financial advisor can help you make an informed decision based on your financial needs and your ability to pay. Be aware that the financial advisor works for a financial institution: his or her role is to sell you a product, like credit, from that institution. The best thing to do is compare the different products on the market before choosing the one that best suits you.

A variable credit contract means that you have a maximum amount of credit, known as a credit limit, which you can spend in full or as needed. You decide how much you use, as long as it does not exceed the amount set by the credit issuer: a bank or a credit union.

These are some of  the forms of variable credit:

• Credit cards: these allow you to buy goods and services now and pay for them later. If you pay off your purchases in full by the due date, often the 21st of every month, you will not be charged any interest. However, if you do not pay back the full amount, you have to pay interest on the unpaid amount. The interest rate on a credit card is often very high, between 18% and 20%, which can significantly increase the length of time you spend repaying the debt as well as the total amount of your debt.

• Line of credit: this works like a credit card. You have a set amount of money from your bank or credit union that you can use in full or in part, as long as you do not exceed the limit set by your financial institution. For example, if the bank gives you a $5000 line of credit and you spend $4500, you cannot buy a $600 stove. You will have to pay part of your line of credit back before you can make transactions worth more than $500, because this is the amount of money you have left. You also have to pay back the interest on the amount you use each month. The interest rate is lower on a line of credit than a credit card.

With variable credit contracts, you decide how much you use without exceeding a limit. A money loan agreement lets you borrow a fixed amount. This type of loan is often used to finance larger projects such as buying a car, purchasing a house or pursuing your education. However, you must repay the amount borrowed according to a payment schedule set out in the credit contract. 

Forms of money loans include:

• Personal loan: A personal loan is a fixed amount of money that the bank or credit union gives you in full and you have to pay back with interest in regular instalments. Be aware that you cannot get any extra money once the loan is in your account.

• Student Loan: A student loan, unlike the personal loan, is provided by the government through the Student Financial Assistance loans and bursaries program. Visit the following page to find out more about how student loans work: Loans and Bursaries for Full-Time Studies.

• Mortgage: A mortgage is a loan from a bank or credit union to finance the purchase of a home. If you can no longer make your monthly payments, the credit issuer (bank or credit union) can repossess your home to pay off your debt.

An instalment sales contract lets you buy an item from a merchant. You become the owner of the item after you finish paying for it. This type of contract involves credit costs, so it is important to find out the total cost of the item.

Examples of purchases made with this type of contract include:

• Household appliances

• Television sets

• Furniture

Before signing a credit contract, check that all of the following mandatory information is available: 

• Your name and address, as well as those of the credit issuer

• The date and place where the contract was signed

• The amount borrowed, the interest rate and the credit costs

• The total amount to be repaid, which includes the amount borrowed plus interest

• The amount, the number and frequency of payments to be made (specific dates)

• A description of the item, such as furniture or electronics, you are giving as collateral, if required

• Your signature and that of the credit issuer

• The cancellation conditions

In addition to this mandatory information, other elements can be added to the contract.

Read the credit contract carefully to make sure you know your obligations and those of the credit issuer.

When you sign a variable credit contract, you are responsible for making the monthly payments set out in the contract, giving you the right to use the good or service right away. 

Here is a table that summarizes all your credit-related rights and responsibilities:

Let’s say you decide to apply for a credit card from your financial institution. Before you sign the contract, you read through it to make sure that all the required information is included. The first time you receive your statement, you check all the transactions made during the month, then immediately pay the total amount indicated so you do not have to pay interest. You do the same thing every month: as soon as you receive your statement, you pay the total amount of your debt, which in turn improves your credit score. Then, an event happens that disrupts your life, and you completely forget to pay off your card. You panic and call your financial institution about the forgotten payment. Your credit rating may not be affected if this is the first time it has happened to you, and if it has only been five days since the payment was due. You pay off your card and make sure to set a payment reminder on your cellphone for next time. Later in the year, your wallet gets stolen at a party. You call your financial institution immediately the next day and notify them of the theft. They lock your card, and you will not be responsible for any transactions that were made without your permission. All you have to do is wait for your new card and be glad you acted so quickly.