Banking and Credit

What does a bank do? Banks help us manage our money by accepting deposits, encourage saving and safekeeping our money. Banks provide us credit by providing loans and mortgages and helping us purchase larger items like cars, businesses and homes

Credit Credit is the ability to use someone else’s money for a period of time. A creditor is a person or business that loans money A debtor is someone or a business that borrows money

What is interest? Interest – there are two types of interest A) If you invest money in a stock on the market, a bond, or a mutual fund, interest can be accumulated on money made if the stock, bond or mutual fund becomes more valuable. B) If you are going to borrow money, you have to add interest to the amount of money that is loaned to you by the bank.

How do loans work? A loan is made up of two parts: A) Principal: the amount borrowed B) Interest: The amount charged by the lender, paid by the borrower, usually expressed as an annual interest rate as a percentage. I.E. you borrow $40,000 at an interest rate of 5% (the 5% is interest per year) Principal + Interest = total cost of the loan

Loans What can you get a loan for? To get a loan you need some sort of collateral - such as a car, a consumer item or even a co-signer that can vouch for your ability to make repayments. (A co-signer is putting their credit rating on the line) Car – to purchase a car Student Loan – to pay for tuition Line of Credit – to tap into if you are short money in your bank account Business Loan – money loaned to help start a business or grow it Personal Loan – between two different people/groups

Mortgages A mortgage is where real estate is purchased and the real estate is attached as security; Meaning if you do not repay the loan the creditor has the right to sell the property to get their money repaid. This security helps make the interest on the mortgage low. Interest on a mortgage is usually quite low. Currently interest on a mortgage in Canada is about 2 – 3%. In the 1980’s interest on a mortgage was 18 – 20%

Loan or Mortgage Terms Principal and Interest Rate: the annual amount of interest paid Term: the length that the rate is agreed upon Amortization: the time period it will take to repay the entire loan including principal and interest, using the current rate.

Credit Worthiness Creditors evaluate potential borrowers based on the 3 Cs Character, Capacity and Capital

Character Your credit history, past ability to pay loans, work history, age Beacon Score or Credit Bureau

Capacity Your ability to pay the loan back-your income, your expenses, dependants, other loans/ mortgages, dependability of your income

Capital The value of your assets, which can be liquidated if you cannot pay the loan back. e.g. Savings accounts, assets such as cars, properties, rent or own your primary residence, vacation properties

Credit Bureau A business that gathers credit information on borrowers and sells that information. When you agree to a loan or get a credit card, you are agreeing to let the bank share your information. This information is kept for seven years.

Credit Rating An indication of “Risk” that a borrower will pose if credit is granted to them. You get a score assessed to your credit rating – that score indicates if you are a safe person to borrow money to or not. You need a credit rating to buy products like a cell phone, a car, a mortgage, to get a loan, a line of credit or a credit card. Note: every time someone accesses your credit rating your credit rating takes a negative hit.

How to get a “Good” Credit Rating Pay bills on times Pays monthly balances on credit cards Debt kept at a reasonable level Loans have been paid off in the past with few or no issues.

How to get a “Bad” Credit Rating Pay bills late or miss payments Too many credit cards Large amount of consumer debt outside mortgage Applies for many loans/ credit cards in a short period of time Has declared bankruptcy

What is a credit card? It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.

Credit Cards As there is no collateral, a credit card is an example of unsecured credit Visa and MasterCard are credit cards Credit Cards have HIGH interest. When purchasing products interest can be between 11%- 25% When using the credit card as cash advancement, interest can be between 18 – 28%

Charge Cards A charge card is similar to a credit card except you have to pay the full balance every month or statement period American Express is a charge card

3 Kinds of Credit Cards Offered by a bank - ie TD Visa, Scotia Visa, BMO MasterCard Travel and Entertainment Card such as Diners Club or American Express A “House” Card such as Sears, the Bay, Esso, Home Depot, etc.

How Credit Cards Work It is an unsecured loan where the cardholder can spend up to a pre-set limit At the end of the month, the balance is totalled, a statement is mailed whereby the balance is due (usually 21 days from the statement date) After that interest is charged on any outstanding amount of money A minimum payment is due every month if the full balance cannot be paid. Missed or late payments negatively impact your credit rating

Credit Card Benefits Convenience Security Benefit Programs such as airmiles, points, cash back Track your spending Automatic payments for regular bills like utilities, phone, gym, etc.

Credit Card Negatives Revolving debt Unsecured so higher rates Easier to spend money Credit rating Total amount of outstanding debt/ potential debt can grow

DO NOT Credit Cards, Loans, Mortgages, and etc… are pretty legit as they are backed by banks. Banks, particularly in Canada, have a lot of regulation and intervention by the government. Thus they tend to be safe places to borrow money from. However….. Pay Day Loans, Cash Advance, Money Mart and etc… are HORRIBLE places to borrow money. They are a scam, they prey on the vulnerable and people usually are never able to get out of debt when they borrow money from these businesses.

Bankruptcy Bankruptcy – is when you go to the bank and claim you are unable to pay your loans, creditors (those who you owe money to), and mortgages. Bankruptcy is an agreement between you and the bank where they bank will pay off all your debts. You are then obliged to make payments back to the bank – sometimes it is the full amount of debt you owed, or sometimes it is a different arranged amount. Once you have paid all the money owed back to the bank you will be free of bankruptcy. However, bankruptcy kills your credit rating and will be on your credit report for five years (even if you pay off your debts in three years).