Credit in Canada is the opportunity to borrow money in different forms from various lending institutions to pay for your goods and services. In Canada, it is considered a privilege to have access to credit because you are able to make big purchases and pay them back over time, whereas you would otherwise need to find the cash to pay for them in full. Paying for things like a car, home, washing machine, home repairs or furniture can be very difficult for many Canadians who already find it difficult to save 10% of their monthly income, much less to save up all the cash for a big purchase such as these. So they rely on credit so they have an opportunity to enjoy a good or service while making payments over time. This article will further outline the advantages and disadvantages of credit.

There are different types of credit and different types of lenders. Credit products include things like credit cards, loans, lines of credit, payday loans, car payments and buy now pay later plans. Lenders can be your bank, credit union, car dealership, payday lenders or sometimes a company will act on behalf of a lender, like in the case of purchasing furniture or cars, where the dealership or furniture company will sell you the product but have you get financing through a lending institution. These institutions may be banks or they may be high-interest lenders.

Even though many of us would rather do without credit, having a credit history and a credit score are very important in Canada. If you go to buy a home, a car, or a computer, the lenders want to see how well you pay back the money you borrow. If you rent an apartment or home, the owner will likely pull your credit report, even though rent payments are usually not reported to the credit bureaus, the owners will still use your credit score as an indication of how likely you are to pay your rent on time. Phone or internet companies may also pull your credit report before signing you up for a plan. Some jobs will also pull your credit report and score, this is usually to ensure you are not a liability to their organization. These are normally jobs where you are working with people’s confidential information. Your credit report will also list whether or not you have any judgements, bankruptcies or consumer proposals, and this information is useful for companies looking to hire you.

A credit bureau is an organization that keeps a record of the various accounts you have opened, the lenders you have borrowed from and personal information like your addresses and job information. This collection of information is called a Credit Report. You can access this information by going to one of the two major credit bureaus in Canada which are Equifax and TransUnion. There are other agencies that will offer free credit reports, but remember that the information on these reports is not always accurate and these reports cannot be used in an official capacity. But they are good for giving you an overview of what your credit report will look like. Some banks are also offering free credit reports and scores. So you may want to check with your bank before purchasing a credit report. Once a year you can get a free consumer disclosure from Equifax and TransUnion. A consumer disclosure is essentially a more detailed credit report that does not include a score, it's meant to list who you owe and how much you owe and list more information than what would normally be on a regular credit report.

As with anything else, there are advantages and disadvantages to using credit. Above I mentioned how you can have access to major purchases even if you don’t have all the money. You also qualify for lower interest rates and bigger loan amounts if you have a higher credit score. But having too much credit can quickly put you in debt. Payments on credit cards, payday loans and cars can add up and become too much to manage every month. If you start struggling to pay your credit payments then this can affect your other bills, and if you fall behind on payments then your lenders will report this to your credit bureau as well. If you start having negative information on your credit report then your credit score will fall. Ignoring a payment does not make it go away either. You can also be placed into collections, which is when a third-party agency starts contacting you on behalf of the lender you owe. Collection agencies are very persistent and having them on your credit report will severely sink your score.

The important thing to remember in a society that deals with credit, is that the responsibility is yours as the consumer to be careful about your borrowing. Always check your budget before applying for credit, because you need to make sure you will be able to keep up with your other payments. You do not always have to say yes to every credit product offered. One credit card is enough to start building your credit. If you prefer cash because it keeps you on track then use cash. Also, be vigilant about sharing your information online, especially your Social Insurance Number (SIN) because there are many cases of identity fraud, and people can use your information to take out loans in your name, then if they default, you are stuck with the bill. When in doubt, do your research before committing to any contracts for credit.

Resources

Credit report and score basics

How To Dispute Information on Your Credit Report

Newcomers and Credit in Canada

Get Help With Your Debts

Know Your Rights

Stop Collection Calls

Statute of Limitations on Debts

How KOHO Can Help

  • KOHO also offers a credit-building feature to help improve credit scores.

  • If you are a premium member or you have purchased one of the bundles, you get access to Financial Coaching

  • For people who have low credit scores, it can be challenging to obtain a regular credit card, and sometimes even a secured card comes with too many hurdles. KOHO offers an easy online application process and does not require a down payment as a secured card would.

  • Your KOHO card isn't just a prepaid card, you also have access to many banking features like maintaining a savings and spending account, bill payments, and e-transfers.

Further Reading

Solutions To Manage Unsecured Debts

Difference between TFSA and RRSP

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