Who uses credit

t's becoming easier to access credit and more people are using it to pay for unforeseen expenses and on-the-spot purchases.

There's no shortage of offers from financial institutions and big-name stores, so it's a good idea to think carefully before you accept.

If you're a student you may already have a credit card like the Regular MasterCard. If so, it's in your best interest to use it properly and pay it off on time. This will help you build a sound credit history. which will work in your favour when you apply for other forms of financing such as a mortgage.

The Student Line of Credit is another solution that can help you cover your school expenses, and teach you some of the ins and outs of credit.

Credit is not Without Cost

The opportunities to use credit are many and tempting, but interest charges can be very steep.

The total cost of a loan purchase is determined by the amount of the item, the interest rate, and the repayment period. For example, a loan of $2,500 at a rate of 10% repaid over two years would cost $268.70 in interest, for a total of $2,768.70. On a loan of $5,000 at the same rate over the same period, the interest would be $537.39 for a total of $5,537.39.

Year Real cost Hypothetical
cumulative interest
(10%)
Real cost Hypothetical
cumulative interest
(10%)

0

$2,500.00

$0.00

$5,000.00 $0.00

1

$2,696.53

$196.53

$5,393.09 $393.09

2

$2,768.70

$267.70 $5,537.39 $537.39

Interest can also be charged on your credit card purchases, but can be avoided if you pay off the full balance on your card before the due date, which is listed on your account statement.

What are the Dangers of Credit?

Treating yourself is fine… within reason. Use your card intelligently and you’ll spare yourself a world of pain. In fact, credit is easy to master. Once you know the basics, you’ll never fall into the “late payment” trap.

Cash advances – You can use your credit card to get cash. The bank will start charging you interest the minute you take out the money and may also charge service fees for the transaction. So, rule #1: Only use cash advances for emergencies… avoid using them as everyday cash.

Going over your credit limit – Your bank will assign a maximum spending limit to your credit card. If you go over it, your purchase could be refused. Rule #2: Always keep within your limit, and never spend more than you can afford to pay back.

Impulse buying – Do you really, really need it? Make it a habit to ask yourself that question. Don’t be persuaded by sales or “amazing deals” just because a credit card makes it so easy to buy. If you can do without this item you’re holding in your hands, put it back!

Using your card too much – A credit card should never replace or “bump up” your bank account or budget. If your paycheck and savings can’t cover restaurants or all the shopping you want to do, don’t think of your credit card as more spending power. It isn’t free money! It’s only a method of payment using money that’s within your budget.

Using your card to pay other bills or expenses – This is always a bad idea. You may enjoy a month before seeing your credit card bill, but you’ll get quite the shock when you open the envelope. Your credit card should never be used to finance your other ongoing living expenses. So, don’t use your card as financing.

Knowing what’s a real emergency – Okay, a year-end sale at your favourite store might feel urgent at the time. But really, the best thing to do is to write down a list of real emergencies before you even leave the house with your card in your wallet. As with anything else, you need to establish your limits beforehand and stick to them, even though you might be tempted to do otherwise.

Some Valuable Advice

  • Use your credit card as an emergency payment tool or for big-ticket items only. Avoid using it for impulse buys.
  • Don't exceed your card's credit limit and keep up with payments. Only use credit if it's the last option available to you.
  • In order to maintain a high credit rating, don't write a cheque if you don't have the funds in your account to cover it.
  • If you borrow money and suddenly have the funds to pay off the loan...do it: you'll save on interest expenses.
  • If you can't make your payments, be proactive by letting your creditors know and by making arrangements with them.
  • Be careful: using credit unwisely can be very expensive.

A Good Budget is Important

A budget is useful for keeping track of your income and expenses, as well as for determining how much you can save for your financial goals.

Remember, the more often you check your expenses, the better your chances of sticking to your budget and saving enough for your special project.

Your budget should ideally include all your receipts and disbursements. Naturally, you can change your budget if there's been a change in your life, like getting a raise, receiving an inheritance, or having to cover an unexpected expense.

Budget Calculator