The Four Types of Canadian Credit
When it comes to managing your finances, credit can play a significant role. Credit allows you to borrow money for different purposes, including purchasing a car, buying a home, or paying for your education.
In Canada, there are four main types of credit: instalment credit, revolving credit, mortgage credit, and open credit. Each type of credit works differently, and it’s essential to understand the differences to choose the best option for your needs.
Let’s explore each type of credit in more detail.
Instalment Credit
Instalment credit is a type of credit that you pay back in equal payments over a set period. This type of credit is often used for large purchases like a car or furniture.
With instalment credit, you know exactly how much you need to pay each month and for how long. The interest rate on instalment credit is usually fixed, which means your monthly payments remain the same throughout the term.
The benefit of instalment credit is that it can help you budget your money and manage your expenses effectively.
Revolving Credit
Revolving credit is a type of credit that allows you to borrow up to a certain amount of money whenever you need it. This type of credit is often used for everyday expenses like groceries or gas.
With revolving credit, you have a credit limit, and you can borrow up to that limit whenever you want. You can also pay back the money you borrowed in full or in part, and your credit limit will adjust accordingly.
The interest rate on revolving credit is usually higher than instalment credit, and it’s typically variable, which means it can change over time.
Mortgage Credit
Mortgage credit is a type of credit that is used to purchase a home. With a mortgage, you borrow money from a lender to buy a property, and you pay back the loan over a set period, usually 25-30 years.
The interest rate on a mortgage can be fixed or variable, and the amount of interest you pay depends on the type of mortgage you have. A mortgage typically requires a down payment, which is a percentage of the property’s value.
The benefit of mortgage credit is that it allows you to purchase a home that you may not be able to afford outright.
Open Credit
Open credit is a type of credit that is not tied to a specific purchase or loan. With open credit, you have a credit limit, and you can borrow up to that limit whenever you want.
Open credit is often used for business expenses or travel.
The interest rate on open credit is usually higher than instalment credit, and it’s typically variable, which means it can change over time.
Conclusions and Further Thoughts
In conclusion, credit is an essential part of managing your finances, and understanding the different types of credit available in Canada is crucial.
Whether you need to make a large purchase, pay for everyday expenses, or buy a home, there is a type of credit that can meet your needs.
Instalment credit, revolving credit, mortgage credit, and open credit each have their advantages and disadvantages, and it’s up to you to choose the best option based on your financial situation and goals.
Sincerely,
Michael
PS – One of my hobbies is blogging about mortgages, debt and government policy. During the day I’m a MORTGAGE BROKER in Kelowna, BC!
Check out the Huber Mortgage Home Buyers Guide HERE
