Calgary Journal Online

Do you know how much that purchase is really going to cost?

Most of us have credit cards in our wallets and know how easy they make it to spend money. But many people don’t know how costly credit can really be when interest charges are added to the mix.

Access to credit is a near-absolute necessity of modern life. A Torque Market Intelligence poll conducted on behalf of Credit Canada indicates more than 80 per cent of Canadians carry a credit card and 43 per cent carry three cards or more. Yet, the same poll suggests 28 per cent of the borrowing public doesn’t know the interest rates on the cards they carry and 80 per cent do not know their credit score. These statistics may indicate that few people understand how credit works and how quickly misuse of credit can get them into pretty big trouble. Deb Thibault, a personal lender with Alberta Treasury Branches, isn’t surprised by those statistics.

People in the finance industry say they aren’t surprised many Canadians are flushing money down the toilet.

Photo: Julie Vincent/Calgary Journal

“I’ve heard a lot of people say, ‘I am not going to get much for my investments so I might as well spend (my cash) now.,” Thibault says. “I think we still have lots of people out there that are at the top of the extended credit and still living large.”

Calgary-area realtor Jeff Mikolajow agrees, saying he isn’t surprised how often people get into financial trouble.

“We never learned anything (about credit) in high school,” he says of the many clients he sees who know nothing about their credit or how it works.

Plastic money functions in much the same way as a loan with the main difference being that unlike a loan, which as a defined start and end date, credit provide revolving access to funds; as the consumer pays off the amount owing, the card is topped back up to its limit.  Considering credit cards come with interest rates ranging between a few points over prime to nearly 30 per cent, problems can start when cards are not paid in full every month.

Unlike interest on a loan, credit card interest compounds, or rolls over, from month to month; any unpaid balances are subject to an interest charge. Consumers who carry balances on their cards will see interest charges applied to unpaid balances – and to interest charged in previous months. This compound interest compounds every month for as long the debt remains unpaid.

For example, an item bought for $1000 using a store card with a rate of 28 per cent and where the consumer only pays the card’s minimum payment of $15 every month will take years to pay off and will cost that consumer $1616 in interest charges on top of the original cost of the item.

Misuse of credit may not cause serious annoyance for some people but consumers who carry or ignore balances for several years can cause serious, long-term damage to their credit rating. Canada has two credit reporting agencies: Equifax, the main reporting agency, and TransUnion, a secondary source of credit information.

Both systems track a consumer’s credit and spending habits from the moment he or she applies for any product where the lender or supplier reports to the credit bureau. Credit card and store card companies report to the bureau every 30 days, as do various other organizations.

In British Columbia, most cities and towns report unpaid parking fines; Rogers Mobility and Fido report cell phone payments in all Canadian provinces; Ontario reports unpaid utilities. Your credit history follows you wherever you go.

The bureau also tracks whether there are balances on a consumer’s cards and notes high balances. A “balances too high” notation is a flag lenders pay attention to because it can – and usually does – mean the potential borrower may be getting close to hanging themselves financially.

Based on these reports, the credit bureau system issues a credit score, which is a statistical representation of a consumer’s spending and repayment habits. The higher this score, the more credit-worthy a consumer is considered. Possible scores range from 300 to 900, with most conscientious consumers having scores in the 650 to 750 range.

The credit bureau also reports a consumer’s R rating, which indicates whether payments are made on time and if payments are up to date. The top R score is R1, which means a card is in good standing.  An R9 score means a card has been unpaid for more than nine months and has gone to collections.

The credit score and the R ratings on a consumer’s file are what a anyone lending money – a car dealership mortgage lender, or Future Shop, for instance – will look to when advancing credit. In the current environment of economic uncertainty, many lenders are hedging their bets by refusing to lend to any consumer who has less than excellent credit.

Rosmin Little, a mortgage specialist with ATB Financial, says people must be more careful with how they manage their credit.

“We are much more cautious with our lending now,” she says. “Things have really tightened up since the crash and banks are being more careful with who they lend to and how much risk they’re willing to take on. We rely more heavily than ever on the client’s credit history than we have in the past.”

The best policy is to simply not purchase non-essentials or to delay those purchases until they can be paid for either in cash or near-cash, like debit, she says.

More importantly, Mikolajow says, consumers should definitely hold off on additions to their credit burden when they planning a large purchase such as a home or a car.

“The biggest thing we see is that once people get their mortgage approval they’ll go off and make another huge purchase and then they can’t close their mortgage,” Mikolajow says. “We’ve had deals come close to crashing because a client’s credit has become worse between deal and possession.”

The bottom line with credit is that less is more —  credit must never be considered an extension of income. Money borrowed is money that must be repaid as quickly as possible so the $25 trinket bought on credit does not become a $300 item that was thrown away two years before it was finally paid off.

For more information on the credit bureau, go to www.equifax.ca. Credit counselling services are readily available though Money Mentors (www.moneymentors.ca) or at any chartered bank or credit union.

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