Credit

Your parents have probably told you that having a credit card will help you build a good credit report, which will come in handy later when you need to buy a house or a car. It is true that, if used responsibly, credit is a great way to finance important decisions, such as pursuing your education, starting a business or renting an apartment. But consumer credit can quickly become a trap if you are not careful, so it is important to know how it works before using it.

Credit is easy to access, which makes it very attractive. You can buy goods or services without having to pay for them immediately, giving you the impression that you have plenty of money to buy what you want. But in reality, this money does not belong to you. It is lent to you by a credit issuer (store, bank, credit union, person, etc.). That means, as soon as you buy goods or services on credit, you have to pay the money back with interest, which is usually very high.

To make sure that you will be able to repay this amount in full, the credit issuer will investigate your financial situation and decide if you can access the credit. They will look to see if:

• you have a regular job: if you are on an internship or have a temporary job, there is a greater risk that you will not repay the borrowed money;

• you have a high enough income to pay what you owe;

• you have valuable assets (car, house, furniture, valuable jewellery, investments);

• you have other debts: owing a lot of money to several people or companies is generally not a good idea;

• you pay back your debts on time.

If you decide to buy a car, your credit history is the first thing financial institutions look at to see if you can repay the loan. The same goes for renting your first apartment: to make sure you will be able to pay the monthly rent for the apartment, the landlord will analyze your credit behaviour. This information is described in credit reports.

More specifically, your credit report includes:

• personal information such as your name, date of birth, address and social insurance number;

• information about your financial behaviour, such as types of credit used, payment habits (missed payments, exceeding authorized credit limits, etc.), banking history (NSF cheques or pre-authorized payments), bankruptcies, etc.

If you have never applied for credit (e.g., a credit card), you will not have a credit history yet. Your credit report is created the first time you apply for credit, and it follows you throughout your life. This is why it is important to develop good payment habits.

The credit issuer considering your loan application may find that your financial situation is too unpredictable. In this case, the issuer will want more assurances that the money lent to you will be repaid and may ask you to have someone else guarantee (or co-sign) your loan. This means that the person who acts as your guarantor is completely responsible for paying back your debt if you stop doing so. This person could be a sibling, parent, another member of your family or a friend.

Here are the reasons why credit issuers may require a guarantee:

• They are unable to assess your credit history because you do not have one yet, since this is your first application.

• You have a bad credit report: outstanding debts that you have left unpaid or are unable to pay, or late payments.

• You are renting your first apartment and do not have a credit history: some landlords may ask for a guarantor to co-sign the lease to make sure that you can pay your rent every month.

Being a guarantor carries certain responsibilities. For example, credit issuers may ask the guarantor to pay off your loan in full if you stop making payments, even if the payment deadline has not been reached yet. This debt will also appear on your guarantor’s credit reports, which can lower their credit score.

To find out if you are a person with good financial habits, credit issuers rely on what is called a credit score. It is like a test at school: the higher your grade, or score in this case, the better.

When you forget to pay your cellphone or Internet bill, your score goes down. It is like not studying for a test: your results will be worse. When you only pay the minimum amount due on your credit card, your score also goes down. By doing this, you are increasing your overall debt because you have to pay interest, often at a very high rate, on the unpaid amount every month.

Other financial habits can also hurt your credit score, such as:

• Borrowing money you will not be able to pay back

• Using your credit card to pay for your basic needs

• Having multiple credit cards, meaning multiple debts

Misusing credit over a long period of time can have direct consequences on many aspects of your life and cause unnecessary stress and anxiety. A bad credit report can prevent you from getting a loan for a future home or car purchase. Some people even go into excessive debt because their income is no longer sufficient to pay all their debts.

There are solutions and tools you can use to get out of excessive debt or reorganize your budget to afford the projects and plans that are important to you. You can:

• ask yourself if you really need a particular item and, if not, put off buying it until later;

• limit yourself to one credit card and always pay off all your debt each month;

• lower your credit limit;

• create a realistic budget in which you build in an amount to save for plans;

• buy used goods as often as possible from thrift stores and social media groups;

• sell things that you no longer use;

• if possible, use public transit instead of a car and get books from libraries instead of bookstores.