Introduction to Credit

Introduction to Credit

Written by Caitlin Wood
Last Updated November 30, 2021

There are many misconceptions when it comes to credit. Some people seem to believe that it works as well as money, and allows you to buy things when you are a little short on cash. While that may be true to a certain extent, credit is actually a tool that can be used to help you or to trap you depending on the decisions you make with it. Credit is really a loan, one that must be paid back with interest and not playing by the rules could end up costing you more than you gained from any of your objects.

What is Credit?

The word credit comes from the Latin root word “credo” which means “I believe.” When credit is extended to you, it is on the belief that you will pay it back. Really what you are doing is making a promise to pay the bank or institution later for the goods and services that you are purchasing today.

In the past, credit was extended by individual businesses such as grocers and local fabric makers. People would have a long standing relationship with these businesses and so they would be trusted to buy things on credit. If somebody didn’t pay their bill, they would have their credit line severed and they would have to settle the entire bill on the spot or face criminal charges.

This has evolved into a system where the individual stores don’t extend their own credit, instead they will except credit that is extended from the major credit cards like Visa, Mastercard, and American Express. This shift in the extension in credit has lead to a standardized measure of credit worthiness which is your credit score.

What is a Credit Score?

A credit score is a standardized measurement of your credit worthiness. It takes a number of facts about your past credit history, how much money you have coming in, how much you have borrowed, and your general stability to determine how likely you are to pay your bills in the future. You can look up your credit report online and find your credit score.

There are two major credit bureaus that report credit scores and these are Equifax and TransUnion. They generally range in score from the 300s to scores in the mid 800s. It varies depending on the reporting institution.

What Affects Your Credit Score?

Your credit score can be positively and negatively affected in many ways. The single biggest thing that can affect your credit score is having late or missed payments. This can result in huge hits to your score and will even show up on your credit report when it is run. Other things that can affect your score is having a high debt-to-income ratio. If you have more debt than you make, this will negatively affect your credit worthiness. Click here to see exactly how your credit score is calculated.

However, if you are smart and diligent when it comes to your credit behavior it can be a huge asset to you. Having credit extended that is in good standing and paid on time will show potential creditors that you are responsible and this will come in handy when you want to buy a house, get a high paying job, or upgrade your car.

Find out more about your credit worthiness and what you can do about it by clicking here.

And click here for information on improving your credit score.

Rating of 5/5 based on 1 vote.

Caitlin is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

Click on the star to rate it!

How useful was this post?

Research & Compare

Canada's Loan Comparison Platform

Largest Lender Network In Canada

Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.

Make Smarter Borrowing Decisions

Whether you have good credit or poor credit, building financial awareness is the best way to save. Find tips, guides and tools to make better financial decisions.

Save With Loans Canada

Special Offers

50 Free Trades Offer

50 Free Trades Offer
Ends August 31st, 2022

Almost $500 in commission-free trades. Code “50TRADESFREE”. Conditions apply.

View Offer
Borrow Today, Don’t Pay Till July

Borrow Today, Don’t Pay Till July
Limited Time

Borrow $500-$50,000 from Fairstone by May 31 and don’t pay until July.

View Offer
Build Credit With Refresh

Build Credit With Refresh

Build credit while spending money with the Refresh Financial VISA card.

View Offer
Build Credit For $7/Month

Build Credit For $7/Month

With KOHO’s prepaid card you can build a better credit score for just $7/month.

View Offer
Industry Spotlight

What's happening with Canada's credit industry?

addy ⎯ Making Real Estate Accessible To All Canadians

addy ⎯ Making Real Estate Accessible To All Canadians

Check out our interview with addy; a platform that allows Canadians to invest in different properties across Canada with as little as $1.

Read Post
Find The Best Rate
In Your Region
Best Personal Loan Provider by Greedy Rates

Confidential & risk-free

All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.

When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.

Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.

Your data is protected and your connection is encrypted.

Loans Canada Services Are 100% Free. Disclaimer

Keep Track Of Your Credit Score

Subscribe with Credit Verify to monitor your credit rating and get your free credit score.