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Borrowing money can work for you or against you, depending on how you handle it. If you borrow wisely, debt can be a valuable tool that helps you manage expenses over a period of time. It can be part of a strategy to help you achieve your goals. But if you use debt carelessly, it can threaten your financial future.

Factors to consider in using debt:

• Types of credit  
• Your responsibilities when you borrow  
• Your credit rating  
• Using debt wisely  
• Avoid dangerous debt 

Types of credit

There are many types of credit, each with different features that make them appropriate in different circumstances:
 

• Credit cards are convenient for purchases or getting cash for short-term emergencies, but they can become very costly if you don’t pay them off quickly
• Loans or lines of credit from banks, credit unions, and trust companies provide flexibility to pay for large purchases or pay down high-interest loans, provided you can comfortably fit the payments into your monthly budget
• Overdraft protection is a short-term loan from your bank to cover debits or cheques when there isn’t enough money in your account. It’s convenient, but adds costs to your transactions
• High-cost loans like paycheque advances or some deferred payment plans from retail stores may appear attractive, but they can also be very costly. They can charge very high interest rates and fees that can end up draining away your spare cash

Your responsibilities when you borrow

Here’s what to think about before you borrow: 
 

•  Borrow only what you can repay. Be sure you have enough income to make the payments when they’re due
• Understand your credit contract before signing it. If you aren’t sure what something means, ask the loans/credit officer to explain it. You’re making a legal commitment, so you need to know exactly what you’re committing to
• Make the payments as agreed. If you run into trouble, don’t avoid it. Talk to the loans/credit officer and explain the situation
• Keep your cards, PINs and passwords secure, and check your credit slips and statements. You are responsible for reporting any errors
   

Your credit rating

 
Understand the value of your credit rating and take care to keep it in good shape. 

• Before financial institutions extend credit, they assess your credit rating by looking at your credit record. This is a review of your ability to repay a debt, based on your character, income, economic history (employment, previous financial records, and so on), and assets (savings or other property).
• They often check with independent agencies, known as credit bureaus, for information about your history with other companies, like telephone companies and banks. Credit bureaus are companies that track people’s credit history. With your consent, they share this information with companies you want to do business with. They charge the companies for access to your information. 
• If your payments are behind schedule, your credit rating may be low and will appear on your credit history. 
• The better your credit rating, the more likely financial institutions will be willing to lend you money. If they consider you a good credit risk, they’ll often offer a lower interest rate, saving you money. If you have a poor credit rating, they may charge a very high interest rate, or refuse to offer a loan. 
• You can request a copy of your own credit report from these companies, and you can have them correct any errors in it. The two main credit bureaus in Canada are Equifax Canada Inc. and TransUnion Canada. 

Using debt wisely

Your decision to use debt, whether for short-term purchases or to finance a home, vacation, or an expensive household purchase, should be made with both short- and long-term factors in mind:

• Short-term: you don’t have to wait to accumulate savings before moving towards your goals. However, interest on debt adds to the cost, and you have to budget for regular payments.
• Long-term: you can achieve your goals earlier. Taking on debt limits your future choices, because you’ll have to pay it back, which will reduce the money you have available for other options. Building a positive credit rating by using debt responsibly can make financing easier in the future. However, a bad credit rating will limit your options in many ways.

Because debt is expensive, your best financial strategy is usually to pay it off as quickly as possible. You can pay in the short term, or you can pay in the long term, but you have to pay. The longer you put it off, the more your debt will cost.

What can you do to avoid dangerous debt?

• Keep your credit rating positive. Pay your bills on time, and don’t take on debt you can’t pay off. 
• Go to reputable agencies like banks and credit unions for loans. 
• Keep some savings ready for emergencies. 
• If you run into credit problems, you can get free or low-cost advice from community and government organizations. In BC, you can get information from the Credit Counselling Society. 
• Be on the watch for scams and rip-offs. Check the Investor protection section for InvestRight information and warnings about investment scams and the Better Business Bureau for consumer scams in your area.