Credit…what’s it all about?
Transferable skills
Curriculum expectations
F. Financial Literacy
F1.4 explain the concepts of credit and debt, and describe how financial decisions may be impacted by each
F. Financial Literacy
F1.4 explain the concept of interest rates, and identify types of interest rates and fees associated with different accounts and loans offered by various banks and other financial institutions
Introduction
What is credit and how is it related to debt?
Is there a right time to borrow money?
Let’s explore these questions together!
Teacher Ravi says: Before we get started, remember that everyone’s financial situation looks different. It’s important to be respectful and avoid comparing ourselves to others.
Recording information
When we explore new information, we can take notes to help us remember different facts and ideas.
- We can take notes to help us record new information.
- We can use words, drawings, or short sentences when we take notes.
- We should try and use our own words while taking notes.
- We can record questions in our notes.
Credit types
Credit is the ability to borrow money or access goods or services with the understanding that you'll pay it back at a later time, sometimes with interest.
Press the following tabs to learn more about the different types of credit.
A credit card is a plastic card that allows the cardholder to borrow money from their financial institution to pay for goods and services. Different credit cards have different credit limits (a maximum amount of money that can be borrowed). The borrowed amount must be paid back according to the rules set by the company.
If the credit card holder pays back the borrowed amount by the due date (typically the end of the month), they will not pay any extra fees. However, if they cannot pay the borrowed amount in full by the due date, then they will be charged interest (fees) on the unpaid amount. The amount of interest charged depends on the interest rate. An interest rate is usually a percentage of the amount that is owed. Credit cards typically offer higher interest rates than other types of credit.
Some credit card companies provide cards that gather points or redeem rewards, but those cards may have special fees attached.
A line of credit is a type of loan that a financial institution agrees to lend you up to a pre-set amount. It’s like having a jar of money that you can borrow from when you need to. You may use as little or as much of the funds available up to that specific limit.
You can pay back the money you owe at any time, however, interest will be charged on top of the borrowed amount. And, unlike a credit card, if you take out some money, you start paying interest on what you borrowed right away.
Usually, the interest rate on a line of credit is lower than credit cards.
Some lines of credit require additional fees. For example, you may need to pay a registration fee.
Source: Financial Consumer Agency of Canada. (2025, March 28). Lines of credit. Canada.ca. https://www.canada.ca/en/financial-consumer-agency/services/loans/loans-lines-credit.html
Personal loans allow you to borrow a specific amount of money and pay it back over a set period of time.
You must pay back the full amount, including interest and any other fees, by making regular payments called installments.
Usually, the interest rate on a loan is lower than credit cards and lines of credit.
Did You Know?
Did You Know?
There are special credit options available for students in post-secondary education.
Student credit cards
Student credit cards allow people with little or no credit history to get approved while in school. They usually have lower credit limits, and do not require an annual fee (yearly fee) or a minimum annual income (amount someone makes yearly).
Student lines of credit
Students who are enrolled in a post-secondary institution may be eligible for a student line of credit to help pay for expenses like tuition and living costs. Student lines of credit typically offer lower interest rates than standard lines of credit and a more flexible repayment plan.
Student loans
In Canada, students who are continuing their education after high school may apply for a student loan called the Ontario Student Assistance Program (OSAP). Part of the loan is funded by the federal government and does not add any interest. Another part of the loan is funded by the provincial government and may add interest depending on the rules set by the province.
Before we continue, let’s pause to consider some vocabulary terms connected to our learning.
Vocabulary terms
Press the following terms for their definitions.
The federal government is the branch of government that uses collected sales and income tax to fund goods and services nationally, or country wide. This means that the federal government oversees all of Canada, which includes legislative authority over First Nations and First Nations reserves.
The provincial government is the branch of government that uses collected sales and/or income tax to fund goods and services in each province and territory (e.g. Ontario, Manitoba, New Brunswick, Yukon etc.).
A credit score is a number that shows how responsible someone is about paying money back that they borrow from a financial institution.
Source: What is a credit score? Kids’ definition and tips for building good credit. (2024, July 24). FreeKick. https://freekick.bank/what-is-a-credit-score-kid-definition/
Debt is the amount of money that someone owes to their financial institution.
Let’s reflect!
What are some of the similarities and differences between credit cards, lines of credit, and personal loans?
How might these different credit types be used in various scenarios?
Record your thoughts and share with a partner, if possible.
Factors that impact debt
Whenever you borrow money and agree to pay it back later, you are using credit and the money you owe is your debt.
Together, the three factors that impact debt are:
- the borrowed amount
- the interest rate
- the time to pay it back
All credit types have rules around the amount borrowed, the interest rate, and the time to pay back debt. Depending on someone’s credit score and financial situation, companies and financial institutions provide specific conditions.
Quick loans
Some lending institutions have in-person and online sites where you can get a loan without having to pass a credit check or provide other financial information. They often charge a much higher interest rate, which means that the overall cost of borrowing money is a lot higher.
It is always a good idea to ask a financial advisor or another trusted source when considering applying for credit.
Applying for credit
Okay, so let’s say you are at a stage where you can apply for credit. To begin, you may think about the following questions:
- What do I need the credit for?
- How much credit do I need?
- What is the timeframe I have for paying back my debt?
Avery says: How does someone know which type of credit to use?
Teacher Ravi replies: That's a great question, Avery. Let's review the types of credit that we learned about and find some examples.
Credit cards might work for smaller purchases like clothes, food, and other everyday essentials. If you can pay the money back by the due date, you won’t pay any interest and you might even get some rewards!
Loans might work for best for bigger purchases that take more time to pay back. For example, when buying a car, a house (mortgage), or starting a business, a loan is a good option.
A line of credit might work best for larger ongoing bill payments like electricity, car payments, or home maintenance and improvements. This credit option is more flexible and can be paid back at any time.
Avery says: I think I get it! Credit cards are best for smaller items, loans for more expensive things, and lines of credit for… flexibility!
Teacher Ravi replies: That’s a great summary! And remember, it's always important to compare interest rates before deciding on the right type of credit for the situation.
Budget
Once you have borrowed money and used credit, you might revisit your budget to see how you could adjust it to start paying back your debt. Depending on the situation, the amount of credit could be a small amount or a large amount. It could be borrowed for a short period of time or a long period of time. Depending on the amount of interest collected, this will mean that you will need to adjust your payment amounts accordingly. It might mean that you take a good look at your overall expenses and cut down any unnecessary spending.
Press the following tabs to review the steps for creating a budget.
It’s okay to feel a bit stressed or confused when thinking about money. Everyone is different, and that means that your decisions will be based on what works best for you.
What are some of the main things you are spending your money on? Are these purchases needs or wants?
Do you have a source of income? If so, estimate how much money is coming in per week or per month.
Whatever your savings goal is, once you know how much money comes in and where it goes, you can decide how to move forward. Perhaps you want to make more money, spend less, or just avoid overspending.
You can always adjust your budget as you need, if there are changes to your income, expenses, or goals. Again, a budget should be tailored to your needs. That means it works for you!
Repayment strategies
Every person’s financial situation looks different. There are many ways to pay off debt. The important thing is to make a choice that is right for you, and if it becomes too overwhelming, seek the support and advice of a financial advisor.
A loan, like a car loan or a mortgage, is generally paid off in fixed installments. This means that every month, you pay the same amount of money back.
However, credit cards and lines of credit work a little differently.
Someone might only be able to make the minimum payment each month. This would keep their credit in good standing, but it will take much longer to pay the total debt, especially as the interest charges grow.
Someone else might be able to make the minimum payment, along with an additional amount. This would keep their credit in good standing and help them pay off their total debt faster.
Someone else might use credit to pay for something, and then pay off the whole amount as a lump sum. This will clear their debt completely, with no additional interest charged.
What do you think are the pros and cons of using credit?
Share your thoughts with a partner, if possible.
Self check
For each item select the corresponding definition.
Teacher Ravi’s credit options
Teacher Ravi is planning to go back to school to further his education and professional learning, while continuing to work as a full-time teacher.
He must make one large payment now to cover the first half of his courses, and another large payment in the middle of the year to cover the second half of his courses. He also needs to consider how he will pay for his books and other materials.
He has looked at his budget and cut out any unnecessary spending, however he needs to use credit to cover his immediate costs.
What are two or three tips you could share with Teacher Ravi about credit types?
Record your ideas and share with a partner, if possible.