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Credit and Debt
What is Credit?
Credit is the exchange of goods or services for a promise to pay in the future.
Common Forms of Credit
- credit card
- line of credit
- bank loan
Things to Consider Before Using Credit
Before using credit or borrowing money, review the following:
- Good debt vs. bad debt:
- Good debt describes borrowing that can improve your overall financial situation over time. For example, a student loan for education that could help you secure employment and a higher income.
- Bad debt describes borrowing to buy things that you consume or that have short-term value. For example, going into debt to buy a new phone when your old one works just fine.
- Impact on your budget:
- How much do you need to borrow?
- Do you need the money right now or can the expenses wait until you have money saved?
- Can you afford the monthly payments?
- What happens if you miss or can’t afford a payment?
- Read the fine print:
- Take the time to read and understand the terms and conditions associated with your credit or loan agreement.
- Ask questions if anything is unclear to you.
The Four "C"s of Credit
- Character: Will you repay the debt?
- This refers to your desire to pay off your debts when due.
- Potential creditors will look into your financial history to determine how likely you are to pay back your debts when they are due.
- Capacity: Can you repay the debt?
- This refers to your ability to pay back your debt.
- Potential creditors will consider and review your income, expenses and savings. This gives creditors an idea of whether or not you’re able to pay back your debts in a timely manner.
- Capital: Do you have the financial ability to pay?
- This refers to your long-term financial strength and assets to pay off future debts.
- Having a house, car, job and other valuable assets will increase your chances of receiving credit from financial institutions.
- Conditions: Are there external conditions that could influence the repayment of your debts?
- This refers to events and conditions that are beyond your control that could impact your ability to pay off debts, such as being laid off at work or in an economic recession.
Credit Comparison
We’ve compared three common forms of student credit:
- Ontario Student Assistance Program (OSAP)
- student line of credit
- student credit card
Take time to familiarize yourself with the details of each so that you can select the option that’s right for you, if needed.
Disclaimer: This information is for general comparative informational purposes only. Economics conditions and personal circumstances may impact these factors. Please contact the National Student Loan Service Centre and or your financial institution for more information.
OSAP
A government-funded financial aid program consisting of grants and loans provided by both by the Ontario and federal government.
Student Line of Credit
A type of loan that lets you borrow money repeatedly up to a preset limit.
Student Credit Card
A type of loan that lends you a limited amount of money.
OSAP
Available to Ontario residents who are: Canadian citizens, permanent residents or protected persons who are enrolled in full- or part-time studies at an approved public or private postsecondary school. For more information on specific eligibility requirements, visit the Learn About OSAP website.
Student Line of Credit
Be prepared to provide proof of enrolment as a full- or part-time student at a recognized Canadian postsecondary institution. A parent or guardian may need to co-sign your line of credit application. By co-signing your application, they are also responsible for the debt should you be unable to pay it back.
Student Credit Card
Be prepared to provide proof of enrolment as a full- or part-time student at a recognized Canadian postsecondary institution.
Having trouble choosing a card? Consider using the Credit Card Selector Tool from the Financial Consumer Agency of Canada to compare features of different credit cards.
OSAP
OSAP funding is based on several factors including education expenses and personal financial situation. For more information and to see how much funding you could be eligible for, visit the OSAP website.
Student Line of Credit
Financial institutions may access your income and potentially your co-signer's income (if applicable).
Student Credit Card
Financial institutions tend to not require a large income or proof of income which makes them great first cards for you to establish credit history.
OSAP
If you graduated high school within the last four years, your family financial status may be accessed to determine the amount of funding you’re eligible for. Parents are not financially responsible for the loan. For more information, visit the OSAP website.
Student Line of Credit
A parent or guardian may need to co-sign your line of credit application. By co-signing your application, they are responsible for the debt should you be unable to pay it back.
Student Credit Card
Parental support is generally not required when applying for a student credit card.
OSAP
Interest-free status is granted to full-time students while they compete their studies. During this time, no interest accrues on your student loan. For more information on interest rates, visit the Pay Back OSAP website.
Student Line of Credit
Interest will accrue as funds are used. You must pay at least the interest, even while in school. Interest rates vary. Contact your financial institution for more information.
Student Credit Card
Interest rates vary, but are generally in the high-10s to low-20s per cent range. If full balance of the credit card is not paid by the due date, interest will accrue daily. Contact your financial institution for more information.
OSAP
No payments are required for six months after your last confirmed study period. During this time you will be notified by the National Student Loan Service Centre (NSLSC) of: how much you owe, your total number of payments, the date of your first payment and the interest used to calculate your payment. Payments are made to the NSLSC (not OSAP).
Use OSAP’s repayment calculator to find out what your monthly payments will be when you leave school. For more information on repayment, visit the Pay Back OSAP website.
Additionally, the NSLSC offers online webinars on demand to educate you about your loans in general (Orientation Presentation) and about what to do when it is time to repay your student loan including the repayment process, tips on how to save on interest, and what to do in the event that you are having difficulty making payments (Repayment Presentation)
Student Line of Credit
Once you graduate, most financial institutions allow you to continue paying only the interest for a grace period of six to 12 months. After that time, you are required to start paying back the money you borrowed (the principal) and the interest until debt is paid back in full.
Student Credit Cards
Payment is required monthly by a set due date. If the entire balance of the credit card is not paid by the due date, interest will accrue daily. For more information on credit card payments, visit the Financial Consumer Agency of Canada's paying off your credit card webpage.
Are you currently carrying a balance on your credit card and wondering how long it’ll take to pay off? Consider using the Credit Card Payment Calculator from the Financial Consumer Agency of Canada.
OSAP
You are required to fill out an OSAP application each academic year.
Student Line of Credit
If you are in good standing, there is no need to reapply – a student line of credit lasts for the duration of your studies.
Student Credit Card
If you are in good standing, there is no need to reapply – a student credit card lasts for the duration of your studies.
OSAP
If you are having trouble paying back your student loans, you can apply for the Repayment Assistance Plan to make reduced monthly payments or no payments. Use the Government of Canada’s Repayment Assistance Estimator to see if you could be eligible.
Student Line of Credit
There is no payment support available if you are unable to pay your debt.
Student Credit Card
There is no payment support available if you are unable to pay your debt.
Student Credit Cards
Student credit cards often offer cardholders incentives, some of which may include:
- No annual fees: financial institutions understand that most students have minimal income while completing their studies and often offer cards with a $0 annual fee. This allows students to obtain a credit card at a low cost.
- Earn rewards: when using your credit card, you could be eligible to receive reward points that are redeemable for cash back, retail merchandise, travel and gift cards.
The Power of Interest and Debt Repayment
In terms of repaying debt we often lose sight of that fact that we are actually building our wealth. The interest charges on our loans and credit cards can significantly increase our debt load in the same way that interest gained on investments can accelerate our wealth.
Many believe that paying off debt comes before investing and that building wealth and paying off debt shouldn’t occur simultaneously, but the fact is that the two tasks are absolutely compatible! For every single dollar you pay toward your debt, you are indeed increasing your net worth by that same dollar amount and even more.
How does that work? Because for every dollar of debt you pay off, the amount of interest you pay to the bank/creditor goes down, and that means more money in your own pocket.
Let’s use an example. Suppose you have a net worth of $100,000, but you also have outstanding loans. Your goal is to save $500 a month and put these extra funds towards this loan. In as little as six months you paid off $3,000 of your debt and your current net worth is $103,000, a gain equal to the amount of debt you’ve paid off. That’s an increase in net worth of roughly 3%.
The bonus is as you continue to pay down your debt, your net worth continues to increase, you pay less interest to your creditor and debt reduction really begins to ramp up (in the same way growth builds in your investments).
A warning: Debt that is continually revolving, as in credit card debt, has serious implications for debt elimination. Credit card debt and cash advances have very high interest rates, and just like your investments, the higher the interest rate and amount owing the faster that debt will grow. Credit cards are not recommended for debt that will take a long time to retire. Credit options, like loans where the rates and monthly payments are fixed, are more effective because these parameters help mitigate the consequences of compounding issues.
Bankruptcy and Insolvency
Bankruptcy: A legal process that can provide relief to individuals who are unable to pay their debts.
Consumer proposals: A legal process similar to bankruptcy except they help a personal pay off debt through settlement agreements.
For more information on settling your debts, finding a Licensed Insolvency Trustee or accessing bankruptcy records, visit the Government of Canada's Bankruptcy website.
Sources
- Ryerson’s RU DebtFree program
- Catholic Family Services of Hamilton
- Financial Consumer Agency of Canada
- OSAP