To help you stay financially healthy you need to understand credit.
Credit is access to money that belongs to lenders (e.g. individuals, institutions, finance companies). It offers you the ability to purchase items or services that you cannot pay for right now in exchange for agreeing to pay at a future date—with interest.
The problem with credit is three-fold.
- Credit can give you a false sense of financial health. Lenders will often extend credit whether or not it is good for your financial situation.
- Many people don’t consider the final cost of a purchase when interest is taken into consideration, particularly if only minimum monthly payments are made. Interest charges add up quickly and can create a financial burden that it is hard, and sometimes nearly impossible, to overcome.
- If you take a long time to repay a debt, the lender is happy because they make a lot of money on interest. However, your cost will be higher and you will undoubtedly make more purchases during that period of time.
Here are some important things to note about credit
- Borrow only what you need and can afford. If you can’t pay off a debt quickly, you can’t afford it. It’s as simple as that.
- Credit is “sold” to us by persuasive marketing strategies that promise happiness and convenience.
- Credit card companies establish low minimum monthly payments or low introductory rate offers to maximize their profit, not to help you.
- Ultimately you need to ask yourself, can I afford to take on this debt? And if I do, what other opportunities am I giving up in exchange (e.g. the opportunity for stress-free living, more time for enjoyable activities because you can spend less time earning an income, money to put towards savings and retirement funds)?
For more information about financial well-being, the following resources may be helpful.
- MoneySense Magazine (Canadian resource). www.moneysense.ca
- Invest in your financial well-being. Government of Canada. https://www.canada.ca/en/financial-consumer-agency/news/canadas-financial-literacy-blog/invest-financial-well-being.html
- Canada’s Financial Literacy Blog. Government of Canada. https://www.canada.ca/en/financial-consumer-agency/news/canadas-financial-literacy-blog.html
- Canadian Financial Calendars. My Money Coach (From Credit Counselling Society). https://www.mymoneycoach.ca/resources/financial-calculators
- Credit Counselling Society. https://www.nomoredebts.org/
- Mortgage Affordability Calculator. Canada Mortgage and Housing Corporation (CMHC). https://www.cmhc-schl.gc.ca/en/finance-and-investing/mortgage-loan-insurance/homebuying-calculators/affordability-calculator