All Canadians use the services of banks and other financial institutions, and often borrowing from them.
To effectively deal with these debts, it is important to know the rules for issuing loans.
You could skip the first sections of this article, but then you will probably have to address the debt reduction questions with credit card or debt obligations experts. Be sure to check out Part 1 of this series on our blog.
Where do banks get the money for loans?
Canada’s modern financial system allows banks to issue loans with practically non-existent money before the loan was issued. The bank does not require a reserve deposit that covers at least some of the loan amount issued.
Banks only bear the costs of:
– Marketing and promotion of credit services
– Maintenance and management
– Losses from non-payments
– Technical support and development of computers and other technologies.
In other words, loans issued by banks are almost free for banks. At the same time, banks can receive up to 7 types of income from lending out money. And all this income comes to the banks from our pockets.
There’s much to learn from how to use this free money at the lowest cost, save on bank charges and even earn additional income that could go towards paying off your mortgage or other loans you may have.
How to find out your credit rating?
Not many people know that there are two credit bureaus in Canada that keep a profile for each of us. These are Trans Union and Equifax. It is important to periodically check your credit files in each of them at least once every few months, and if you are going to take out a loan, then even more often.
If you do this check personally, it does not affect your credit rating (unlike the verification by financial institutions or other institutions which is considered a “hard credit inquiry” or a “hard check”).
This check can be done for free if you register on the websites of two commercial companies. In exchange for the fact that you register on the site and involuntarily read their ads, you are given access by the sites CreditKarma for Trans Union and Borrowell for Equifax.
Some think that they can get this information through their bank’s website, but banks do not provide a complete picture like the mentioned sites, they can only slightly supplement it.
If you are married, it’s recommended that both spouses register and access their credit files. Once you’ve registered, you can monitor the changes in your credit history and get an insight on how to improve your score.
Credit Card Rules:
For debts not to be a burden, you can do a few things like increase your credit limits and have at least five cards. One or two for daily use, cards for special use (we’ll talk about these in other articles), and also allocate one or more for preferential loans.
As of now, September 2024, there are more than 180 different types of credit cards in Canada. You can even find credit cards that offer to pay off the balances you have on other credit cards of other banks in installments of 9-12 months (with payment from 1% to 3% per annum).
When working with credit cards, it is important to know that certain banks allow to not only extinguish accumulated debt on other credit cards, but can also transfer the loan to your bank account. Simply put, even your debt can be invested.
Multiple banks allow you to transfer part of the credit limit of one of your cards to increase the credit limit of another one of your cards from the same bank.
You can find out if you have a pre-approval to increase the credit limit of a particular card by calling your bank (in this case it can be increased without an official request to the credit bureau).
Each bank knows which of the credit bureaus tracks its cards. As a result, you can apply for credit cards taking into account a higher rating in the credit bureau where the bank is served.
You can pay off debts from your credit card not only on your card, but also on your spouse’s / partner’s card(s).
How to pay off your debts on loans:
Many of us already understand that, first of all, it is necessary to reduce those debts on which the highest interest is paid.
At the same time, it is necessary to take into account bad and good debts.
Good are those that help reduce taxes, that is, the interest paid on them reduces taxable income. In other words, these are borrowed funds taken for investment or for doing business. To correctly calculate the interest on payment of good debts, it is necessary to reduce them by a percentage of your personal marginal tax.
Marginal tax is a tax in maximum percentages on the income of a particular taxpayer.
To be continued in the next article.
Photo by Andrea Piacquadio from Pexels
