Credit - Handle With Care - Government of Ontario (Canada)

Credit — Handle With Care

Borrowing — to buy a house or a car, or pay for a vacation — is part of today’s Canadian lifestyle. And lending is a major industry.

For most people, the ability to obtain credit is a valuable asset. Credit provides a handy way to shop without carrying large sums of money. It helps us cope with emergencies, such as a car breakdown or replacing a roof. It can also help us budget our needs and wants. But credit can have a downside, as well. It can encourage us to live beyond our means. High minimum payments can make it hard to meet basic expenses – things like rent, food and clothing. Interest charges can eat up money that could be used for other things.

In the end, whether or not to borrow is an individual decision. If you decide you want to make use of credit, check your finances first to see if you can really afford it. Make sure the payments will leave you with enough money to meet other necessary expenses.

Shopping for Credit

Do your homework. Shopping for credit should be the same as shopping for anything else. You have many potential lenders to choose from — banks, credit unions, trust, loan, finance, and life insurance companies, credit card organizations and retail stores. Interest rates and lending conditions can vary widely, and it pays to find out which lending source can meet your particular needs at the lowest cost.

Be aware, though, that applying to several organizations for credit within a short period of time could negatively affect your credit rating. Once you’ve done your comparisons, it’s then time to apply for credit.

Are You Credit-Worthy?

Your ability to borrow will depend on your credit record — if you have established one — and on what lending agencies traditionally call the “Three Cs”:

Character. Do you really intend to repay the debt? Have you shown responsibility in handling your finances in the past?
Capacity. Do you earn enough to repay the debt? How secure is your job? Do you own or rent your living accommodations? How long have you been there?
Collateral. Do you have life insurance, savings, a car, equity in a home, household goods or any other assets that can guarantee repayment?

In addition to the Three Cs, some lending agencies use a "credit point" scoring system to help them make up their minds. Points are assigned for such individual characteristics as occupation, stability of employment, residence and credit references.

Consumer Reporting Agencies

Before granting credit, a retailer or lending agency may want to verify the information in your application by checking with a consumer reporting agency. These are private agencies that serve retailers and lenders by collecting information on borrowers from other credit-grantors and publicly available sources of information.

Starting with the first time you use credit, most of your borrowing transactions may be recorded by one of these agencies. Your file may also contain information on lawsuits, pending litigation or other matters of public record that might influence a lender’s decision.

All this information goes into your consumer report and helps establish your all-important credit rating. A good rating is a valuable life-long asset. It’s in your own best interest to protect it by handling your financial obligations responsibly.

If They Say 'No'

It’s estimated that 20 per cent of credit applications are turned down. If it happens to you, don’t panic. You can look for credit elsewhere. Lending agencies want to do business, and there are a lot of them out there. Where one might decline an application, another might gladly accept it.

If you’ve been denied credit on the basis of a credit report, the creditor is required to advise of that fact and provide, at your request, the name and address of the consumer reporting agency.

You can contact the consumer reporting agency and ask to examine your file for free. This is your legal right. If the file contains information that isn’t accurate, and it can be proved, the agency is required to make a correction.

Getting Started

You may be turned down for credit because you haven’t borrowed before and don’t have a credit record. In this case, you might want to consider establishing one. You could:

apply for a charge account at a local department store or shop;
apply for a credit card from a gasoline company;
join a credit union at work or in your community;
apply to your bank for a personal banking services package deal – they often include a bank credit card;
apply for a loan from a bank or any other lending institution — and pay it off promptly and according to the terms of the loan.

The first time you apply for credit, you may be asked to have someone co-sign your application. Once you’ve successfully maintained an account, you can usually get further credit without a co-signer.

Credit Quick Tips

Once the decision is made to grant you credit, ensure you:

don’t sign a credit contract until you have read and understood it. If you don’t understand it, ask questions until you’re completely satisfied;
make sure you understand the total cost of your purchase or loan. Under the Consumer Protection Act, 2002, you must be given a detailed written statement of the credit costs involved;
avoid "low down payments" and "low monthly payments" deals - the faster you pay, the less it costs;
if you have spare cash, and if the terms of the loan allow it, make lump sum payments - you’d be surprised how this can reduce the lifespan of a loan and interest charges.

Maintaining Your Credit

It’s important to make payments on time. If you run into a situation where you can’t — through over-borrowing, inexperience or unforeseen emergencies — the first thing you should do is contact the lender. Do this before your payment is due. You may be able to protect your credit record by negotiating an easier repayment schedule.

Don’t be afraid to ask for financial counselling, either from your credit grantor or from a member agency of the Ontario Association of Credit Counselling Services. The important thing is to get your finances in order before they spiral out of control.

To Learn More About Credit Regulations

To learn more about the regulations governing consumer reporting agencies or collection agencies, call the ministry at 416-326-8800 in the Toronto area or toll-free at 1-800-889-9768. Special electronic equipment for people with hearing and speech difficulties is available at 416-325-3408 or toll-free at 1-800-268-7095.