In our world of convenience, the matter of credit is often something that isn't afforded much thought. Due to the ever-increasing number of credit providers, it is often thought to be more of a right than a privilege.

The word credit comes from the Latin language, meaning 'trust' and now more than ever, the notion of trust has been extended to apply not only to the person applying for and using credit but also to the organization issuing it. Long gone are the days when consumers were left in the dark when denied credit privileges. Today, laws have been enacted that force creditors to inform applicants of the reason that they have been denied, allow borrowers the opportunity to find out about their credit records and establish a way to settle disputes.

Creditors are also forced to state the cost of borrowing, or using credit, in a language that consumers can understand to give them the option of shopping around to find the best deal for their needs. Consumers can now publicly compare rates of various credit providers; something that was impossible to do only a few years ago.

It is very important for consumers to know their rights and responsibilities where credit is concerned. Consumers should understand the laws that apply to themselves as well as to the creditor. They should also know how to apply for and retain their good credit and if necessary, know how to fix any errors and solve complaints.

The basics of credit

What is credit?

Credit is defined as time that is given for payment of goods or services on trust. It is issued by a creditor and can be used for a variety of purposes. Credit is a convenience in that it allows you to enjoy a purchase while paying for it however, normally there is a cost associated with using credit.

How does credit work?

The first step to using credit is to apply for it. The consumer provides details of their financial standing to a creditor who in turn issues a defined amount of credit if the consumer is deemed suitable. The consumer can then use it to make purchases upon which interest is usually charged. The consumer is normally issued a statement at the same time each month which provides details as to how much the consumer owes and must pay. For example, with a vehicle such as a credit card, consumers are often given the choice of paying off the total amount owing each month or paying a specified amount, including interest, until the whole amount is paid off.

Consumers are required to make their payments in a timely manner, before the due date, to retain a healthy credit rating. Dependent on the circumstances, once the credit has been paid for, it is again made available to the consumer for use.

Who can apply for credit?

In Canada, you have to be over the age of majority in the province in which you reside to apply for a credit card. Be aware however that creditors look at things like how much you earn in your employment and how long you have been employed as well as your ability to repay any debts when deciding who to extend it to.

How do I apply for credit?

The best way to apply for credit is to fill out an application and send it to the appropriate creditor. The creditor will review your application and decide whether credit should be extended to you. While many different factors are considered when creditors look at issuing credit, most focus on your ability and willingness to repay your debts. Also, dependent on the circumstances, they may also require some form of extra security from you to protect them if you are unable to pay your loans. Basically, creditors look at three issues: capacity, character and collateral.

Capacity - This deals mainly with whether you can repay the debts that you incur. To judge this, creditors look at your employment information such as your occupation, what you earn and how long you have worked. Your expenses will most likely also be considered including items like, the number of dependents you have and the amount of child support or alimony you pay, if any.

Character - This refers to whether you will repay the debt. For this, creditors look at your credit history through your credit report to discover things like how much you presently owe, how often you have borrowed in the past, whether your bills are paid on time and if you are living within your means. In order for a creditor to issue credit, they must be comfortable with your level of stability. This is demonstrated through whether you own or rent your home, how long you have lived at your present address and how long you have worked at your present place of employment.

Collateral - This considers whether the creditor is fully protected if you fail to repay your debts. They are interested to find out what items or resources you have, besides income, that could be used to repay your debts. These include property, savings and investments. They may also be interested in what you may have that could be used to back up or secure a loan.

What is a credit rating?

A credit rating, or history is a record that is kept by a credit bureau or reporting agency that details information about your borrowing habits. It is a report on how reliable you have been in repaying past debts and includes information on the amount of credit you have already received. This information is supplied by lenders who have supplied you with credit in the past.

How do I maintain my credit rating?

The best way to maintain a favourable credit rating is to ensure that all payments are made on or before the due date. It is also important to ensure that all mistakes and errors are reported and fixed and that all misunderstandings are cleared up as soon as possible.

Additionally, lost and stolen credit cards should be reported immediately and you should always remain up to date on the information contained in your credit rating record. Your record information can be obtained by writing to the agency that keeps your report. If you notice an error on your credit report, notify the agency immediately to take the steps needed to have it corrected.

How do I obtain my credit report?

You can obtain your credit report by contacting a credit bureau or reporting agency. In Canada, the two main credit bureaus are Equifax Canada and Trans Union Canada.

Normally, to obtain a copy of your credit file you must send a written request to the credit bureau and include the following: a photocopy of two signed pieces of identification, your complete current and former address, your date of birth, a contact phone number during business hours and your social insurance number (SIN). Also, in some cases, you may be able to have your credit report sent to you by fax. Contact the credit bureaus directly for detailed directions for obtaining your credit file.

When should I get a copy of my credit report?

You should review the contents of your credit report prior to making any large financial commitments such as purchasing a new car or a home. This will allow you to avoid any unpleasant surprises when attempting to apply for a mortgage or a loan.

You should also check your credit file for any mistakes or misrepresentations that may appear on it. Also, if you have been turned down for credit, you can obtain the name of the credit bureau that the credit lender has used to order your report. If you feel that your credit report contains false information, you can take steps to correct it at this point.

How is the cost of credit determined?

The cost of credit can be determined and compared by focusing on two terms: the annual percentage rate (APR) and the finance charge.

The annual percentage rate (APR), the key to comparing rates, is the cost of credit on a yearly basis, shown as a percentage. Consumers should pay attention to the APR regardless of the amount of credit or the length of the repayment schedule.

The finance charge is the total dollar amount that you must pay to use credit which includes the cost of interest, services charges and other credit-related costs.

All creditors are obliged to clearly state both the finance charge and the annual percentage rate in order to enable the consumer to compare rates.

What is open-end credit?

Open-end credit can be used repeatedly until a prearranged limit is reached. This type includes department store and bank issued credit cards, home equity credit lines, overdraft bank accounts and fuel company cards to name a few.

Keep in mind that with an open-end credit plan, you are only charged the APR rate. It is important that you determine both the monthly interest charge as well as the APR before signing up for open-end credit. Also, remember that fees for things like annual membership are not included in the APR.

Normally with open-end credit, the creditor allows a grace period in which you have time to pay your bill in full before a finance charge is applied. Creditors are required to advise you of when finance charges will begin and must inform you of the method used to determine the balance on which finance charges must be paid.

What is a lease?

A lease is an agreement between a lessor (property owner) and a lessee (property user) giving the lessee temporary rights to use property for a certain amount of time. This agreement may be subject to stated terms and conditions and involve specified payment terms.

Leases come in two basic types: open-end and closed-end, and while the principal of leasing is similar with both types, the rights and obligations of the lessee at the end of the lease term are different. With both types of leases, the monthly payment structure is determined, in part by estimating what the value of the leased item will be at the end of the lease. This value is also known as the residual value.

What is the difference between an open-end and closed-end lease?

With both types of leases, the residual value is determined at the beginning of the lease and both contain use and wear specifications that must be maintained throughout and met at the end of the lease.

In a closed-end lease, the residual value is guaranteed by, and is the responsibility of the company providing the lease upon it's maturity. With a open-end lease, the lessee assumes responsibility for the residual value of the item at the end of the lease.

Notice:- Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments in this Executive Overview are not intended, nor should they be relied upon, to replace specific professional advice. Before acting on material contained herein, readers should seek advice that is appropriate to their personal circumstances from a professional advisor.