Chapter 6 - Assessing, Managing, and Securing Your Credit

Question 1

Credit

Answer 1

• funds provided by a creditor to a borrower that the borrower will repay with interest or fees in the future
• sometimes referred to as the principal

Question 2

Instalment loan

Answer 2

• a loan provided for specific purchases, with interest charged on the amount borrowed
• it is repaid on a regular basis, generally with blended payments

Question 3

Revolving open-end credit

Answer 3

• credit provided up to a specified maximum amount based on income, debt level, and credit history
• interest is charged each month on the outstanding balance
• eg. credit card, line of credit

Question 4

Advantages of using credit

Answer 4

• allows you to achieve your goals sooner
• helps you establish a good credit history and credit score
• eliminates the need for carrying cash
• allows you to make purchases when cash is not an option
• provides additional benefits, such as air miles and travel insurance
• provides short-term loans for emergencies
• statements help you record and keep track of past transactions

Question 5

Disadvantages of using credit

Answer 5

• you may have difficulty making your payments
• you may make impulse purchases that you cannot afford
• you may damage your credit rating
• there is an interest cost to using credit
• large credit payments take away from your ability to save
• you may need to access savings to cover net cash flow deficiencies

Question 6

Credit reports

Answer 6

• reports provided by credit bureaus that document a person’s credit payment history
• primary bureaus = Equifax Canada, TransUnion Canada

Question 7

Information in a credit report

Answer 7

• personal information
• consumer statement showing the details of any explanation that you have submitted to the credit bureau regarding a particular account
• a summary of your accounts
• your account history
• bank information regarding any accounts that were closed for derogatory reasons
• public information regarding bankruptcies, judgements, and secured loans
• the names of creditors who have made account inquiries
• a list of creditor contacts

Question 8

Credit score

Answer 8

• indicates a person’s creditworthiness
• reflects the likelihood that an individual will be able to make payments for credit in a timely manner
• can affect the interest rate for loans
• scores range from 300 - 900 (a score of 600 or higher is considered good)

Question 9

Credit score criteria

Answer 9

• BEACON score
• payment history (largest)
• amount of credit owing
• length of credit history
• type of credit used
• searching and acquiring new credit

Question 10

Reviewing your credit report

Answer 10

• you should review your credit report from each of the credit bureaus at least once a year
• filing for bankruptcy will remain on your credit record for 6 - 7 years