Whether you're applying for your first credit card or thinking about a loan, it’s important to understand how credit works. Knowing the basics can help you borrow wisely, protect your credit score, and avoid costly mistakes.
What is credit?
Credit is a tool that helps you buy things or access services when you don’t have the money upfront. It’s a financial agreement between you and a lender that allows you to pay for goods or services now. In return, you agree to pay the lender back at a later date—usually with extra costs like interest and fees.
Common types of credit include:
Credit cards – Flexible borrowing with monthly payments
Loans – Fixed amounts with set repayment schedules
Lines of credit – Borrow as needed, up to a limit
Mortgages – Loans for buying a home
Leases – Pay to use something, like a car, for a set time
Note: Buy Now, Pay Later plans are a form of credit, but they work differently.
Learn more about Buy Now, Pay Later
When you use credit, you’re entering into a legal agreement. You agree to follow the terms set by the lender, including how much you’ll pay back, when, and how often.
Credit affects more than just your ability to borrow. It can impact your financial future in many ways.
Every time you borrow and repay money, it’s recorded in your credit history. Lenders use this history to decide if they’ll lend to you again and at what cost. Being a responsible borrower can help you to build a good credit history. This makes you more attractive to lenders and may give you the ability to negotiate lower interest rates.
A strong credit history can help you:
Qualify for loans and credit cards
Get lower interest rates
Rent an apartment or sign up for a phone plan
Be seen as financially responsible in the eyes of lenders
Using credit irresponsibly and spending beyond your means can have the opposite effect. Lenders are hesitant to lend to people with a poor credit history and will most likely charge them higher interest rates.
Credit isn’t free money. It’s a financial responsibility. Just because you’re approved for a loan or credit product does not mean you will be able to afford the payments. Before you sign a credit agreement, take time to understand how much it will cost you to borrow (fees, interest rate, and other charges) and how long it will take you to pay it back. You also want to make sure your payments fit into your budget.
Once you sign for credit on the dotted line, you have entered into a legally binding agreement. In New Brunswick, most lenders are required under the Cost of Credit Disclosure and Payday Loans Act to clearly disclose the true cost of borrowing as well as your rights and responsibilities in their credit contracts. Before you sign, make sure you know exactly what you are agreeing to. If anything is unclear, ask questions. You can also speak with a legal or financial professional before signing.
Using credit wisely can help you stay in control of your finances.
It’s easy to swipe a card or apply for a loan, but before you do, pause and ask yourself:
Do I need this right now?
Can I afford the payments?
Is there a cheaper way to pay?
Give yourself time to think. Walk away from the purchase and consider your options. If you decide to use credit, make sure it fits your budget and you have a plan to pay it off.
A budget helps you track your income and expenses so you know what you can afford. Use Finfo’s budget planner to get started.
Late payments can hurt your credit score and lead to extra fees. Set reminders or automate payments to stay on track.
Always save your credit agreements and payment history. These documents can help if there’s a dispute or if you need to review your terms.
Always make sure the lender is licensed. Ask for a copy of your credit agreement and read it carefully.
If you can’t make payments, talk to your lender right away. You may be able to adjust your plan or get help from a credit counselling agency.
If you fall behind, your lender may send your debt to a collection agency.
Learn more about collection agencies and what they can and can’t do
These companies negotiate with lenders to reduce your debt.
Learn more about Debt Settlement
Credit counselling services can help you manage debt and make a plan. Some are free and non-profit, while others charge fees. Ask questions and compare options before choosing a service.