Consumer Credit

Week 2
Agenda
1) Review of last week

2) Understanding your credit report and credit

scores continued

3) Types of Consumer Credit Products

Overview of Last Week

1) What is credit?

Credit is a deferred payment arrangement between

a borrower and a lender that facilitates access to
funds for repayment at a later date.

What is Credit? (n.d.). CIBC

 Overview of Last Week
2) Why do consumers use credit?
• Convenience
• Advantage: Credit cards can be used without interest charges when outstanding
amounts are paid on time
• Disadvantage: Convenience may also encourage impulse purchases, which may further
increase debt.
• Payment Deferral
• Advantage: Credit allows consumers to make reasonable purchases that exceed their
ability to pay in cash.
• Disadvantage: A repayment schedule reduces cash flow, which may limit the ability to
buy goods and services in the future.
• Covering Income Shortfalls
• Advantage: Personal credit allows clients to meet expenses during period of little or
no income.
• Disadvantage: Interest must be paid regardless of whether anticipated income is
received
(CSI, 2013, p. 2-5)
What to look for on your credit report
Lenders use codes to send information to the credit bureaus
about how and when you make payments.

These codes have two parts:

• a letter shows the type of credit you're using
• a number shows when you make payments

You may see different codes on your credit report depending

on how you make your payments for each account.

(Financial Consumer Agency of Canada, 2019)

 Part 1: What letters mean in a rating on a
credit report
Letter Meaning Example
I Installment credit Car loan
You borrow money for a specific period of time. You make regular
payments in fixed amounts until you pay off the loan.

O Open status credit Mobile phone account

You may borrow money when you need to, up to a certain limit.
R Revolving or recurring credit Credit card
You may borrow money up to your credit limit on an ongoing
basis. You make regular payments in varying amounts depending
on the balance of your account.

M Mortgage loan Mortgage

Mortgage information may be included on your credit report.

(Financial Consumer Agency of Canada, 2019)

 Part 2: What numbers mean in a rating on a
credit report
Number Meaning
0 •Too new to rate
•Approved, but not yet used
1 •Paid within 30 days of billing
•Pays as agreed
2 •Late payment: 31 to 59 days late
3 •Late payment: 60 to 89 days late
4 •Late payment: 90 to 119 days late
5 •Late payment: more than 120 days late, but not yet rated “9”
6 •This code isn’t used
7 •Making regular payments using one of the following debt management options:
a consolidation order, orderly payment of debts, consumer proposal, debt management
program with a credit counselling agency
8 •Repossession
9 •Written off as a “bad debt”
•Sent to collection agency
•Bankruptcy
(Financial Consumer Agency of Canada, 2019)
“For example:
• If you have a credit card account that you paid on time, it’ll
be reported as “R1”
• If you have a mobile phone account, and you missed a
payment by 45 days, it’ll be reported as “O2”
• If you have credit card debt and you’re being contacted by a
collection agency for payment, it’ll be reported as “R9”
• The best rating is 1. Any number higher than 1 will likely
hurt your credit score.”

(Financial Consumer Agency of Canada, 2019)

Equifax – Consumer Credit Scores

• https://www.youtube.com/watch?v=iwqadoWc51k
Samples
• https://cdn.opc.gouv.qc.ca/media/documents/zone_enseignants/sample_credit_rep
ort_equifax.pdf
 Secured
vs.
Unsecured

• Secured debt uses an asset as collateral to support the loan. Because

collateral is used, the interest rates tend to be lower, loan limits higher
and repayment terms longer. In the event of default, the lender can
repossess the asset to pay the debt.(Borrelli, 2021)

• Unsecured debt has no collateral attached to it and relies on the

borrowers promise to pay. In the event of default, the lender may have
to take a financial loss.
• https://www.youtube.com/watch?v=Exmf6M_ZNYQ
 Revolving Credit
vs.
Non-Revolving Credit
Revolving credit is a type of credit granted up to a pre-approved limit,
typically with a monthly repayment schedule. Unlike an installment loan,
there is no fixed number of payments. (CSI, 2013, "1" section)

Non-Revolving credit is different from revolving credit in one major way.

It cannot be used again after it has been paid off. When you initially
borrow money, you agree to an interest rate and a fixed repayment
schedule, normally monthly payments. Depending on the loan agreement,
there may be a penalty for paying off your balances ahead of schedule. (Irby,
2021)
Revolving Credit
Line of Credit
• Secured
• Home Equity (HELOC)
• Unsecured
• Personal
• Student
Credit Cards
Charge Cards
Overdraft
Line of Credit
• A line of credit is a type of loan that lets you borrow money up to a pre-set limit.
You don't have to use the funds for a specific purpose. You can use as little or as
much of the funds as you like, up to a specified maximum. You can pay back the
money you owe at any time. You only have to pay interest on the money you
borrow on a monthly basis. (Financial Consumer Agency of Canada, 2019)

• The interest rate of a line of credit is linked to the prime rate, therefore
the rate can fluctuate.
Types of credit lines
• Secured line of credit
• With a secured line of credit, you use an asset as collateral for the line
of credit. The advantage is that you can get a lower interest rate than
with an unsecured line of credit.
• Home equity line of credit (HELOC)
• A home equity line of credit is a type of secured credit where your
house acts as collateral. It usually has a higher credit limit and lower
interest rate than other loans and lines of credit.

(Financial Consumer Agency of Canada, 2019)

Continued..

• Unsecured lines of credit

• With an unsecured line of credit, the loan isn't secured by any of your assets.
Some types include personal lines of credit and student lines of credit.
• Personal line of credit
• A personal line of credit may be used for unexpected expenses or consolidating
higher interest rate loans. Interest rates are usually lower than for credit cards
and personal loans.
• Student line of credit
• A student line of credit is specifically for paying for post-secondary education.
Student lines of credit can be used to help pay for basic expenses, such as tuition,
books, and housing. They typically convert to a loan with a fixed payment after
graduation.
(Financial Consumer Agency of Canada, 2019)
 Pros:
Pros and Cons of Lines - Can access funds easily without
another loan application
of Credit - Can be used to purchase anything
- Minimum payment is interest only
- Typically has a lower interest rate
than a loan or credit card

Cons:
- Not required to pay down principal,
therefore many people carry the debt
longer paying interest only
- If interest rates rise, your payment
will increase
- Because funds are easily accessible,
many people are tempted to use the
account
- No interest free grace period
Credit Cards
• A credit card is a card that lends you a limited amount of money to pay for
goods and services. You must pay the money back by a certain date.
• The key differences between credit cards are:
• the interest rates
• the fees
• the rewards and benefits
When you make a new purchase with your credit card, you have an interest-free
grace period. The grace period begins on the last day of your billing period.
Federally regulated financial institutions such as banks must provide a
minimum 21-day grace period.
Credit cards are typically unsecured, but secured credit cards are sometimes an
option for people with no credit or looking to rebuild their credit

(Financial Consumer Agency of Canada, 2019b)

Pros and Cons of Credit Pros:
- Interest free grace period of 21 days
Cards -Can help to build credit
-Spending can be tracked
-Can be used outside of Canada to make
purchases in foreign currency
-Security protection
-Many have insurance benefits
-Safer than carrying cash
-Convenient

Cons:
-Many people overspend if they aren’t
disciplined
-High interest charges if balance isn’t paid in full
-Many people don’t understand the terms
-Fees for things like; cash advances, foreign
exchange, over limit, annual fee
Credit card comparison tool
• https://itools-ioutils.fcac-acfc.gc.ca/CCCT-OCCC/SearchFilter-eng.as
px
Charge Cards
• Charge cards are like credit cards; however, the balance must be paid
in full every month and there is no spending limit on the card. Charge
cards are uncommon in Canada.

Store Cards
• A store card is like a credit card but can only be used at one specific
store.
Overdraft

• An overdraft occurs when you don’t have enough money in your bank
account to cover a payment or withdrawal.
• Overdraft protection is a financial product that allows you to cover the
amount of the transaction when you go into overdraft.
• These transactions can include; debit purchases, bill payments and pre-
authorized debits, cheques, withdrawals, transfers between bank accounts
• Interest is calculated daily based on the outstanding balance and charged
monthly
• Overdraft limits typically range from $100 - $5000
• Most lenders require the overdraft to be paid in full every 30 days

(Financial Consumer Agency of Canada, 2019c)

 • Pros:
• Can help to avoid NSF (non-sufficient
funds) charges from your bank
• Can cover a short-term income shortfall
• Cash available for emergencies
Pros and cons • Can save the embarrassment of having
your card declined
of overdraft
• Cons:
• Fees (monthly or fee per use)
• High interest (typically 19%-22%)
• No interest free grace period
• Can be a harmful cycle for some
(Money, 2020)
Non-Revolving credit
• Loans
• Personal Loans
• Secured Loans
• Bridge Loans
• RSP Loans
• Student Loans
• Payday Loans
• Buy now, Pay Later

Mortgages
 Open Credit
vs.
closed credit

With an open loan or mortgage, you can pay extra on it or pay if off in full at any
time without a penalty.

With a closed loan or mortgage, you are limited on your ability pay it off early or
make additional payments. You may be able to, but there would be a prepayment
penalty.
Personal Loans

• With a personal loan, you borrow a fixed amount of money and agree
to pay it back over a period of time. You must pay back the full
amount, interest and any applicable fees. You do this by making
regular payments, called instalments. Personal loans are also called
long-term financing plans, instalment loans and consumer loans.
• Personal loans are typically used for specific purchases such as home
renovations, furniture and cars or to consolidate other debts with
higher interest rates. Most personal loans start at $5000 with a term
between 6 months to 5 years.

(Financial Consumer Agency of Canada, 2019c)

 • Pros:
• The loan will be paid in full by the end of the
term
• You can lock in your interest rate
Pros and Cons • Lower rate than a credit card typically
of Personal • Funds are used for a specific reason
Loans • Cons:
• Less flexibility with payments than a credit line
• Cannot borrow additional funds
Secured loans
• A secured loan is like a personal loan but has
collateral registered against it. New vehicles,
motor homes, boats, etc. are often secured
when financed. As previously mentioned, a
secured loan typically has a lower rate of
interest, higher limit, and longer repayment
schedule than an unsecured loan.
• Vehicles are financed up to 8 years, while
boats and motor homes can be financed up to
20 years.
• Having the loan secured lowers the risk for the
lender and in some cases makes the difference
between getting an approval or decline.
Bridge Loans
• A bridge loan is short-term financing that can help homeowners “bridge”
the gap between the time you sell your current home and buy your new
one. It lets you use the equity in the home you own today to pay the down
payment on your next home, while you wait for your home to sell.
• Bridge loans are short-term loans, typically six months long, but they can
be from 90 days to 12 months or longer. To qualify for a bridge loan, a
firm sale agreement must be in place on your existing home. (RBC, n.d.)
• The loan doesn’t have to be repaid until the home sells, or until the loan
term ends. The rate is higher than a mortgage rate, and usually has an
administration fee.

(RBC, n.d.)
 • Pros:
• Allows the homeowner to use equity in
existing home before it sells
• Prevents the homeowner from using their
Pros and savings
• Easier move between the two properties
Cons of
• Cons:
Bridge Loans • If the existing home doesn’t sell, then you
are stuck paying for both homes and the
bridge loan
• higher interest rate than a mortgage
• Administration fees
RSP LOANS

• A RSP loan is just as it sounds – it’s a loan used to contribute to

your Registered Retirement Savings Plan (RRSP). The term is
typically 1 year, and the client is encouraged to use their tax
refund to pay back the loan. The payment can usually be
deferred for 120 days.

• There is also a “catch up RSP loan”, which is used to top up

unused contribution room in the RSP. This type of RSP loan is
usually paid over 5-10 years, has a higher rate, and is for a larger
amount.
 • Pros:
• Helps to save for retirement
Pros and • Contributions are tax deductible
Cons of RSP • Cons:
Loans • You still pay interest
• You are taking on debt
• You may lose money on your investment
Student Loans
• Student loans are used for post-secondary education and the associated
fees that come along with being a student. They are available to students
that:
• are full- and part-time
• are from low- and middle-income families
• have dependents
• have permanent disabilities
Unlike a student line of credit, you do not have to pay anything while you
are in school. Six months after finishing school the loan goes into
repayment, and at that time the term, rate, and payment are decided.

(Service Canada, n.d.)

 • Pros:
• Allows the client to go to post-secondary
school without having to pay up front
Pros and • No payments are required while in school
Cons of • Typically, no interest is added while in
school or during the 6-month grace period
Student • Loan forgiveness & bursaries
Loans • Cons:
• No guarantee of getting a higher paying
job to pay down the loan after graduation
• Loan must be paid back starting 6 months
post graduation in most cases
Payday Loans

• A payday loan is a short-term loan with high fees that make it

a very expensive way to borrow money. You can borrow up to
$1,500. In provinces the loan must be paid back from your
next paycheque, and in others you have up to 62 days to pay
it back.
• Payday loans are meant to cover a cash shortfall until your
next pay or for a short period. Avoid using them for ongoing
costs such as rent, groceries or utility bills. If you use them in
this way, you may end up in financial trouble.
• The payday lender will deposit money in your bank account or
give you cash.
(Financial Consumer Agency of Canada, 2020)
 • Pros:
• Quick access to cash
• Easy to access (usually you just need a
bank account, address & job)
• Cons:
Pros and • Short amount of time to pay back
Cons of • Very expensive! The cost may be
equivalent to an interest rate of 500-
Payday Loans 600%
• Missed payments can result in high fees
• High costs can make it harder to pay
back, which can increase financial
difficulties and stress

(Financial Consumer Agency of Canada, 2020)

Buy Now, Pay Later

• A Buy Now, Pay Later Plan is where you purchase something

from a company without having to pay for it in full right
away. You can spread the payment over a period of time to
fit your budget. Some companies charge an administration
fee to set up the buy now, pay later plan.
• A buy now, pay later plan generally includes the following
agreements:
1. an agreement with the retailer for the purchase of a product or service
2. an agreement with a financial service provider to finance a purchase

(Financial Consumer Agency of Canada, 2021)

• There are 2 types of buy now, pay later plans.
• Equal payment plan
• With an equal payment plan, you make regular payments.
These are also called instalment payments. The terms of your
agreement set out the minimum amount you must pay each
pay period. You make payments until you pay the full balance.
• Deferred payment plan
• In a deferred payment plan, you must pay the balance you
owe by the due date. There are no set payment amounts. You
manage your own payment plan.

(Financial Consumer Agency of Canada, 2021)

 • Pros:
• Convenient
• Payments over time to fit your budget
Pros and • Usually, no interest if paid off in a
Cons of Buy certain time frame
Now, Pay • Cons:
Later • Upfront fees
• Can encourage impulse purchases
• Missed payments can result in large fees

(Financial Consumer Agency of Canada, 2021)

 Mortgages
• A mortgage is a loan given by a bank
or mortgage lender to help you buy a
home. It can allow you to get into a
home sooner than if you had to save up
for the whole purchase price. The
house acts as collateral for the money
you are borrowing.

(RBC, 2022)
How a mortgage works when buying a home
• The buyer uses funds from a mortgage to pay the seller for the property
and the buyer repays any money borrowed, plus interest and fees, over a
set period of time (e.g., 5, 10, 15, 20, 25 or 30 years).
• The buyer pays the lender generally every month. A portion of the
payment, the principal, is used to pay down the amount borrowed and a
portion of the payment is applied to interest.
• The mortgage is registered on the property with the applicable provincial
or territorial land registry office.
• In many cases, the buyer can move into the new home as soon as the
closing is complete (contract terms can sometimes specify a later move-in
date).
(RBC, 2022)
 • Pros:
• Long term financing (up to 30 years)
• Lower interest rate than other types of loans
• Allows you to purchase a home without having
the cash
Pros and Cons of • Easy to repay (monthly/bi-weekly payments)

Mortgages • Cons:
• Interest rates will change over the life of the
mortgage
• Various fees
• Secured loan (potential of repossession)
• Property value may decrease depending on
market conditions

(WhatHouse?, 2022)
Test your knowledge

Leona just turned 19 and is looking to start building

credit. What product would you recommend for her?

Answer: Credit Card

Charles currently has a line of credit and three different credit
cards that total $25,000. He has no assets to use as collateral. He is
looking for your help paying them off. What product would you
recommend?

Answer: unsecured personal loan (consolidation

loan)
• You meet with your client Marcus and he tells you about his goal
of purchasing a home. What product should be introduced during
the meeting?

Answer: Mortgage
Marina put an offer on a home that was accepted, with the
condition of changing the closing date to February 7 th. She has a
firm offer to sell her existing home on March 1 st. What type of
loan should you offer her to cover the short term financing?

Answer: Bridge Loan

• Your client Moe is looking to buy an older used vehicle from his
neighbor. What product would you recommend for him?

Answer: a personal loan or credit line

You’re meeting with your client Jose, and while prepping for the
meeting you go through his account history. You notice in the last
2 months he has had 2 NSF fees. What product should you
recommend during the appointment?

Answer: Overdraft
Your client Luis works as a seasonal fisherman. He is concerned about
being able to make ends meet in the off months. What product would
you recommend for him?

Answer: Credit Line

• Your client Helena is meeting with you and she mentioned she
wants to go to college in September but doesn’t have money
saved to pay for it yet. What product could you recommend?

Answer: Student credit line or student loan

• Your client Camilla is looking for $400 to cover some unexpected bills
until her next paycheck. You complete an overdraft application for her,
but it is declined. What other type of loan should she consider?

Answer: Payday loan

Your clients Bob and Linda fell ill on their vacation to Miami
which ended up costing them $30,000 in medical bills. They live
on a tight budget and don’t think they could afford to make
another loan payment. They have almost $60,000 in debt already.
They have limited savings but own their home free and clear.
What product would you recommend?

Answer: Mortgage or home equity line

of credit (HELOC)
References
• Borrelli, L. (2021, April 26). What Is The Difference Between Secured And Unsecured Debt? | Bankrate.com. Bankrate.
https://www.bankrate.com/personal-finance/debt/secured-vs-unsecured-debt/#:%7E:text=While%20secured%20debt%20uses%20property,higher%20and%20repayment%20terms%20longer.

• CSI. (2013). Personal Lending and Mortgages. 2013 CSI Global Education Inc.

• Financial Consumer Agency of Canada. (2019b, March 22). Choosing a credit card - Canada.ca. Canada.
https://www.canada.ca/en/financial-consumer-agency/services/credit-cards/choose-credit-card.html

• Financial Consumer Agency of Canada. (2019c, November 26). Getting overdraft protection - Canada.ca. Canada.
https://www.canada.ca/en/financial-consumer-agency/services/banking/overdraft-protection.html

• Financial Consumer Agency of Canada. (2019, March 21). Lines of credit - Canada.ca. Canada. https://www.canada.ca/en/financial-consumer-agency/services/loans/loans-lines-credit.html

• Financial Consumer Agency of Canada. (2020, May 15). Payday loans - Canada.ca. Canada. https://www.canada.ca/en/financial-consumer-agency/services/loans/payday-loans.html

• Financial Consumer Agency of Canada. (2021, March 31). Buy now, pay later plans - Canada.ca. Canada. https://www.canada.ca/en/financial-consumer-agency/services/loans/buy-now-pay-later.html

• Financial Consumer Agency of Canada. (2019c, November 8). Personal loans - Canada.ca. Canada. https://www.canada.ca/en/financial-consumer-agency/services/loans/personal-loans.html

• Irby, L. (2021, October 20). The Difference Between Revolving and Nonrevolving Credit. The Balance. https://www.thebalance.com/the-difference-between-revolving-and-non-revolving-credit-960706

• Money. (2020, October 16). Overdraft Protection: The Real Pros and Cons. CESI. https://www.cesisolutions.org/2020/10/overdraft-protection-the-real-pros-and-cons/

• RBC. (n.d.). How Bridge Financing Can Help You Buy First and Sell Later. Rbcroyalbank. https://www.rbcroyalbank.com/mortgages/bridge-financing-a.html

• RBC. (2022). Understanding Mortgages: An Overview. Rbcroyalbank. https://www.rbcroyalbank.com/mortgages/understanding-mortgages.html

• Service Canada. (n.d.). Repay a student loan - How to start - Canada.ca. Canada. https://www.canada.ca/en/services/benefits/education/student-aid/grants-loans/repay.html

• WhatHouse? (2022). Mortgages - Advantages and Disadvantages | WhatHouse. https://www.whathouse.com/mortgages/advantages-and-disadvantages-of-having-a-mortgage/

•
References
CIBC. (n.d.). What is Credit? Cibc.com. Retrieved January 10, 2022, from
https://www.cibc.com/en/personal- banking/loans-and-lines-of-credit/articles-
resources/what-is-credit.html
CSI. (2013). Section 1: Basics of Consumer Credit. Personal Lending and Mortgages. (pp. 2-5).
Toronto, Ontario: CSI.
CUA - The Five Cs of Credit. (2021). Copyright (c) 2022 CUA.
https://www.cua.com/Home/AboutCUA/AboutUs/CUAuthors/FiveCsofCredit/
Financial Consumer Agency of Canada. (2019, March 21). Understanding your credit report - Canada.ca.
Canada.ca.
https://www.canada.ca/en/financial-consumer-agency/services/credit-reports-score/understand-credit-report.htm
l

RBC Ventures Inc. (2020, January 3). Credit Scores in Canada & How to Build a Credit History. Arrive.
https://arrivein.com/finance/credit-in-canada-what-every-newcomer-needs-to-know/
W.M (2013, August 30). What are TDS, GDS, and LTV ratios? Which Mortgage.
https://www.whichmortgage.ca/mortgage-guide/what-are-tds-gds-and-ltv-ratios/174913