Have you been told you need a credit check for your car loan? Understanding how credit works is an essential part of getting control of your finances. In order to make those milestone purchases like buying a home or a car, a good credit score is necessary. Having a good credit score can be done in a number of ways. However, they all begin with great money management skills and a strong grasp of all things credit. To learn more about what credit is, how to make payments, the different types of credit, and why credit is important, continue reading the article below.
What is Credit and How Does it Work?
Before we dive into the world of credit, it is important that we define what credit is. Generally, credit is defined as an agreement between a lender and a borrower, where the borrower must eventually repay the lender.
But, how does it work? Well, credit allows individuals to access services and goods and repay the cost at a later date. The more timely you make payments, the more trustworthy or creditworthy you become. The most common way that people use credit is through credit cards. Usually, with a credit card, the lender is a credit union or a bank. The lender that issues the card to the buyer then provides them with credit, which they must pay back over time. Typically, these payments come with interest charges. In order to summarize your credit history to determine your creditworthiness, credit bureaus keep a record of how you use your credit. Your credit report will include details like outstanding balances, the number of credit card accounts you possess, loans you’ve taken out if payments were made on time, late or missed, and things like bankruptcies, mortgage foreclosures, and car repossessions.
Types of Credit.
There are four kinds of credit in Canada. These types of credit include revolving credit, charge cards, secured or unsecured lines of credit, installment loans, and a mortgage. Each of these types of credit allows you to do different things.
- Credit Card – Revolving Credit
A credit card allows you to make purchases with a predetermined amount of money (credit limit). Every time you buy something new, you become closer to your credit card limit. Once you pay back your credit card balance, that amount is added back to your available credit. Every credit card has a different interest rate, so it is important to shop around and find the right one for you.
- Line of Credit – Secured/Unsecured
A line of credit (LOC) is a predetermined amount of money that you can use when needed. However, you can only use it up to the maximum amount. With LOCs, you pay interest only on the amount you use. A secured LOC is guaranteed by collateral, like a piece of real estate. An unsecured LOC is not guaranteed by any asset. Unsecured LOCs come at a much higher interest rate than secured LOCs. This is because of the risk involved for the lender.
- Charge Card
A charge card does not have interest, however, once you receive your monthly bill, it must be paid in full. There are very few places that still offer charge cards to Canadians.
- Installment Loan
An installment loan is repaid over a specified period of time and requires a number of scheduled payments. These loans provide borrowers with a sum of money that is repaid with interest, in installments. Car loans and mortgages are both examples of installment loans. However, an installment loan is taken out for other purposes as well.
How to Make Payments and Why Credit Is Important for a Car Loan.
There are many ways to make payments on your credit. The three main ways that people choose to make payments are online, in-person, and over the phone. Nowadays, credit bills can easily be paid online through mobile banking platforms. Borrowers can even set up features like autopay to ensure that payments are made on time each month. However, if online banking isn’t for you, paying in person is still an option. Most places still accept payments by check or cash. Although, cash payments are slowly being phased out by lenders. In addition, payments can be made to the lender by phone or by mailing a check.
Credit is so important in your success as a Canadian. Your credit score can determine whether or not you get a new job, your success with renting a vehicle or home, and the height of your interest rates. Insurance companies and utility companies also keep an eye on your credit score. Having no credit score or a poor credit score can seriously affect your ability to attain a credit card, loan, or mortgage.
Learn more about all things credit by visiting our credit education centre or contacting us today. We’d be happy to help you get back on your feet. Feel free to reach out with any questions that you have about credit or money management. We look forward to helping you achieve your financial goals.
Get a credit check for your car loan, and contact us today!