Understanding credit
Better borrowing
Discover:
- How credit can help you reach your goals and prepare for unexpected life events
- What type of credit is right for you
- How to determine your credit needs
Having credit can be a beneficial tool that can help you reach your goals, build healthy financial habits and help you prepare for unexpected and costly life events. As with anything in life, moderation is key and credit should be used wisely and with caution.
What type of credit is right for you?
As a consumer, you have a number of different credit options available to you, and you must decide which one makes sense for your financial situation. Click on the tabs below to learn about each option.
Personal loan
These are used for a variety of major purchases, with the exception of buying a home. A personal loan can be taken out to assist with the purchase of a car, home appliance, a vacation or home renovations.
Lines of credit
A line of credit is a revolving loan that lets you borrow up to a certain approved limit. You only pay interest on the amount that you have used and the interest rates are generally lower than credit cards. Lines of credit are handy to have for emergencies, and for paying off higher interest credit cards. A credit line can also offer protection against overdrawn accounts.
Credit card
Credit cards can be issued by a number of different institutions and can be used to purchase every day and one-off goods and services and cash advances. If you don't pay back the full amount owing on the credit card on a monthly basis, you will be subject to interest payments on top of your purchase price.
With a credit card, there is a minimum monthly payment that you must pay each month to maintain your credit rating. If you can manage it within your budget, you should always pay more than the minimum in order to pay down credit card debt (which often has a high interest rate) faster. Ideally, you should pay off your balance in full every month.
Mortgage
A mortgage is taken out to assist with the purchase of a home. A mortgage is one of the longest credit commitments most people make in their lives.
The life of a mortgage (also called the amortization period) can be anywhere from a few months to 30 years. Mortgage repayments can be made on a weekly, bi-weekly or monthly basis, and some mortgage agreements include periodic opportunities to pay back a lump sum of the mortgage without penalty.
Finding your balance
In order to help determine how much credit you can comfortably handle, there is a rule of thumb known as the Total Debt Service (TDS) ratio. This ratio states that no more than 40% of your gross monthly income should go towards your mortgage, home expenses and any other debt obligations. Another guideline to follow is to only borrow what you need to make specific purchases and don't borrow as much as you can get.
