What Affects My Credit History?

Objective :

  • Provide reasons for using credit;
  • List the elements taken into account when determining eligibility for credit;
  • Explain the purpose of a credit report;
  • Indicate what information should be included in a credit contract;
  • Identify the consequences of debt.

        Description :

        A range of scenarios will be presented to students, who must explain how their credit history will be tarnished and what they must do to correct the situation or maintain their credit rating.

        Equipment :

             

        Introduction :

        The teacher leads a discussion to introduce the topic of credit histories. He or she asks students:

        Q – What is credit?

        A – Credit allows buyers to make an immediate purchase, even if they don’t have the necessary money. Buyers repay the debt by gradually reimbursing the amount loaned, plus interest.

        Q – When is credit used?

        A – Credit can be used to pay for your education, purchase goods and services, invest, buy a house, start a business, deal with emergencies, travel, make errands easier by carrying less cash, benefit from reward programs, and so on.

        Q – What's a credit report?

        A – A "credit report" is a document with various information about your financial situation. It identifies you, says what money you owe, and says whether you pay your debts.[1]

        There are two main credit bureaus in Canada: Equifax and TransUnion. Their clients include banks and credit unions, rental agencies, credit card companies, service providers (e.g., cell phones), and merchants. These clients pay to access the credit history of credit applicants.

        Q – What's in my credit report?

        A – Your credit report contains personal information like your address and the name of your employers, both current and former. The financial information in the credit report may concern:

        • your bank accounts, including bounced cheques you may have written or payments that were not honoured due to insufficient funds;
        • the credit available to you, such as credit cards, lines of credit, and loans;
        • a bankruptcy or legal ruling against you involving credit;
        • any unpaid debts you may have that were submitted to a collection agency;
        • a list of all persons and businesses that have checked your credit, including lenders, yourself, and other authorized bodies or persons (e.g., a landlord or an employer, if you agreed to a credit history check).[2]

        Next, the teacher presents the Sample Credit Report from Equifax Canada, provided by the Financial Consumer Agency of Canada.

        Working with the students, the teacher reviews the main sections of the credit report:

        • personal identification information (point out how complete the information is);
        • list of banks or merchants that have made credit inquiries on your file;
        • credit history (account and credit transactions, telecommunications accounts, late payments, bounced cheques, credit limits, lost or stolen cards, etc.);
        • other relevant information (collection by an agency, bankruptcy, etc.);
        • merchant’s anti-fraud declaration.

        Q – What's a credit score?

        A – A credit score is a three-digit number calculated using a mathematical formula based on the information in your credit report.[3] Consumers are scored on the transactions that they make and that show lenders they know how to use credit instruments responsibly. However, they lose points for transactions that show they have trouble managing credit.

        In Canada, credit scores range from 300 to 900 points, the best score being 900.

        Your credit score evolves over time, depending on updates to your credit history. When a consumer asks to see his or her credit report, the credit score is not shown unless he or she pays to obtain it. Consumers should ask to see their credit report from Canada's two main credit bureaus about once a year. There is generally no fee associated with such a request. The purpose is to make sure that the information in the credit report is accurate and to request corrections, where necessary. Mistakes can reflect poorly on the consumer's credit habits and lead to a lender refusing to give the consumer credit.

        Institutions use the credit report and score to determine the risk they will be taking if they lend the consumer money. Lenders can also use the credit score to establish an interest rate and a credit limit. A high credit score may mean the consumer will enjoy a lower interest rate on his or her loans, which represents a long-term savings.

        Credit scores are a very important factor, but it's usually not the only one that lenders look at. They also consider income, employment, and assets.

        Q – What information should you check before signing a credit contract?

        A – Make sure the information associated with your credit card or credit line is set out in a written contract, which must include at least the following information:

        • the credit limit, if any;
        • enrolment or renewal fees;
        • the minimum payment required for each period;
        • the period granted to reimburse the account's balance without having to pay credit charges;
        • the annual credit rate (an annual percentage indicating credit charges).

        Instructions :

        Students then gather in groups of two. Every team completes the Maintaining a Good Credit Report exercise, using the Understanding Your Credit Report and Credit Score document as an aid.[4]

        The teacher goes over the exercise with the students using the Answer Key.

        Conclusion :

        The teacher can wrap up the activity by establishing the relationship between credit and debt.

        He or she asks students what they think of credit. The following elements may come up during the discussion:

        • There is good credit (value-producing investments, such as student loans, mortgage loans and business loans) and bad credit (buying consumer products with high-interest credit cards without paying off the balance in full).
        • If I'm given credit, it's because I can pay it back.
        • Credit gives us the impression that we have more money than we really do.
        • With credit, I no longer have to save up money before I buy what I want—I can have everything now.
        • Credit lets me build up my reputation with lenders.

        Attention! The teacher must make sure to conclude this portion of the discussion with the following elements:

        • Using credit to buy and carrying debt greater than your ability to pay puts you at risk of excessive debt.
        • If you reimburse your credit card by paying only the minimum required amount every month, it will be very costly and take you years to pay off the balance.

        Imagine that you are carrying a $10,000 balance on your credit card. Every month, you are reimbursing only the minimum required amount, which is $300. The credit rate for unpaid balances is 19.8%. It will take you 25 years to pay off everything you owe. You will pay a total of $21,969.39 in credit charges.

        To help students understand, the teacher can use the Calculation of Interest on a Credit Card document, which shows how interest is calculated on a credit card when the consumer is paying only the minimum required amount. The teacher can also change the information in the table, such as the amount of the purchase, the interest rate, or the minimum required payment to illustrate other situations.

        The teacher now asks the students the following questions:

        1) What are the signs of too much debt? (Students can also find their answers on the Internet.)

        • Living from paycheque to paycheque;
        • Paying bills after their due date;
        • Borrowing money from people you know to make ends meet;
        • Spending more money than what you earn;
        • Carrying over unpaid balances on your credit cards from month to month;
        • Paying off the minimum balance for one credit card using another credit card;
        • Considering another way to make money to pay off your debt (second job, selling your things, etc.);
        • Making late payments (rent, electricity, phone, cable, etc.);
        • Reducing day-to-day expenses (groceries, clothing, leisure);
        • Being harassed by creditors or collection agencies;
        • Experiencing problems with your physical health (insomnia, loss of appetite, etc.) and psychological health (anxiety, depression, etc.);
        • Arguing about money with your romantic partner;
        • Etc.

        The teacher can take the lesson even farther by asking students how much they think each Canadian spends, on average, for every dollar earned. For example, Statistics Canada estimated that, in the third quarter of 2014, household debt represented 162.6% of available income for those households.[5] In other words, overall, households owe $1.63 for every dollar of disposable income.

        2) How can you avoid excessive debt?

        • Make a budget and follow it;
        • Live within your means;
        • Put aside part of your earnings as savings;
        • Plan ahead for major purchases;
        • Put a limit on the number of credit cards you hold;
        • Pay off your credit card balance every month;
        • Think before you buy and consider whether the expense is really necessary;
        • Etc.

        Available resources 

        Anyone dealing with over-indebtedness can contact a local consumers’ association, the Association de consommateurs in their area [website in French only].

        Reinvestment activity

        The teacher can ask students to discuss what they learned in class with their parents or with a significant adult in their life. At the next class, he or she can ask them the conclusions of their discussions.

        Additional resources

        Credit reports and scores:

        www.canada.ca/en/financial-consumer-agency/services/credit-reports-score.html Financial Consumer Agency of Canada

        Understanding Your Credit Report and Credit Score

        publications.gc.ca/collections/collection_2012/acfc-fcac/FC5-8-25-2012-eng.pdf Financial Consumer Agency of Canada

        Credit Report, Credit Score and Credit Rating

        www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02179.html
        Office of Consumer Affairs (OCA)

        Credit Reports:

        www.educaloi.qc.ca/en/capsules/credit-reports
        Éducaloi




        [1] According to Éducaloi.

        [2] According to the Financial Consumer Agency of Canada.

        [3] According to the Financial Consumer Agency of Canada.

        [4] Financial Consumer Agency of Canada.

        [5] [French-only content:] Statistique Canada se ravise : l’endettement des ménages à un sommet, LesAffaires.com, December 15, 2014, www.lesaffaires.com/bourse/nouvelles-economiques/donnees-revisees-l-endettement-des-menages-s-est-accru/574892.