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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.

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 Licenced Insolvency Trustee or accessing bankruptcy records, visit the Government of Canada's Bankruptcy website.

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