Highlighting Our Partners: The Basics of Credit with Momentum
Calgary Housing Company is made stronger through partnerships with organizations across Calgary that are helping empower Calgarians through positive social change. One of those partnerships is with Momentum.
Momentum provides financial literacy, entrepreneurship, and skills training programs to support people who live with financial barriers. They are a change-making organization that focuses on poverty reduction and bringing social perspectives to economic development. As a leader in the field of economic empowerment, Momentum has created a resource to help navigate credit and use it sustainably.
The Basics of Credit
With more stores and outlets moving to credit-only payment options, a credit card may seem like a useful tool for everyday life. Credit is a way of buying items or services with the promise that you will pay for them later. Credit allows us to live today on tomorrow’s money, which is a valuable convenience, but also can be dangerous.
Before we dive deeper here are some words to know:
- Creditor – The bank or financial institution that gives you access to the credit you will use to make your purchases.
- Credit – The amount of money that you are allowed to borrow from the creditor.
- Debt – The amount of credit you have used.
- Interest – The amount of money the creditor charges you to borrow money.
- Credit Rating – An estimate of the ability of a person to pay back their debt, based on previous dealings.
There are two main types of credit: Secured and unsecured.
Secured credit: Has security, or ‘collateral’ attached to it. The creditor can take back or repossess that pledged collateral if you don’t pay the debt. Examples of collateral is a house or a car. Another way that creditors can secure a loan is through a co-signer, where someone agrees to pay the debt owed if the original person cannot pay.
Unsecured credit: Has no pledged security or collateral. The creditor cannot take any of your non-pledged possessions if you don’t pay the debt. Creditors will have to find another way to collect the money owed, such as a collection agency. Examples of unsecured credit are a credit card, overdraft protection or a line of credit.
Credit cards are often the easiest forms of credit for people to access. The two main credit card companies are Mastercard and Visa. Banks and financial institutions and many retail stores issue credit cards. However, banks are the safest place to obtain a credit card and they charge the lowest interest rates.
All credit cards charge an annual interest rate. The average interest rate is 19.99% and sometimes credit cards also charge an annual fee. Some cards offer rewards such as cashback, points for groceries, etc. Because of these factors, it is best to know what you’re using the credit for, so you can decide what type of credit will be best for you. Credit cards obtained outside a bank typically have much higher interest rates and will cost more to use.
The Financial Consumer Agency of Canada offers a free online credit card comparison tool.
If you are having trouble getting approved for a regular credit card, you may consider getting a secured credit card, which can have all the convenience of an unsecured credit card and can improve your credit rating. This is how it works: you give the bank a deposit which is refundable when you close the account, provided the account is in good standing. This deposit can range from $75 – $1000. You can use the card for 1-2 years, to build your credit rating and then apply for an unsecured card. One of the drawbacks of a secured credit card is that the interest rates are usually higher and sometimes can have additional fees.
Prepaid credit cards also exist and are like a gift card. You pay for it now and use the money for later. This does not build your credit score or credit rating because it is similar to using a gift card or cash, it’s just on a branded card like Visa or Mastercard.
Credit can be a useful tool to buy the services and goods you need now, based on the promise of paying later. Credit has many benefits, but if used improperly can be very expensive and stressful. When using credit always have your financial goals in mind, so that you can leverage it as a tool rather than an obstacle towards financial empowerment.
About Us: Calgary Housing Company provides safe and affordable housing solutions for low- and moderate- income Calgarians in need of non-market rental housing. We operate over 7,100 housing units and administer approximately 3,080 private landlord rent supplements.