Financial Planning Week 5- Consumer Credit in Canada

What is term life insurance?

• Coverage for a specific period (1–25+ years)

• no payout if no claim

Why is term insurance considered “pure insurance”?

It has no investment component or cash value.

What is whole life insurance?

Permanent insurance lasting the policyholder’s lifetime.

What is a cash surrender value?

The invested portion of whole life premiums returned if the policy is cancelled.

Are life insurance proceeds taxable?

Generally non-taxable.

What is the primary purpose of life insurance?

Financial protection for dependents.

What is consumer credit?

Borrow now, repay later.

Name advantages of credit.

• Facilitates purchases when cash is insufficient.

• Convenient and safer than carrying cash.

• Provides grace period (~30 days) before payment is due.

• May offer bonuses (rebates, miles, insurance).

• Demonstrates financial stability.

What is the grace period for many credit cards?

About 30 days before payment is due.

Disadvantages of credit?

• Purchases are more expensive due to fees/interest.

• Overspend; impulse buys.

• Ties up future income; financial difficulties.

• Strain on relationships.

• Missed payments damage credit rating.

What happens if you miss payments?

Credit score decreases.

What is closed-end (installment) credit?

Fixed amount borrowed with fixed repayment schedule.

What is open-end (revolving) credit?

Borrow up to a limit with flexible repayment.

What determines credit capacity?

• Income

• debt ratios

• credit history

• credit utilization

What is the Canadian credit score range?

300–900.

What score is considered good?

600+ (650+ very good).

Name Canada’s two credit bureaus.

TransUnion and Equifax.

What improves a credit score?

On-time payments and low balances.

What does Character refer to?

Borrower’s reliability and employment stability.

What does Capacity measure?

Ability to repay debt based on income and ratios.

What is Capital in credit approval?

Net worth (assets minus liabilities).

What is Collateral?

Asset pledged as security.

What is Credit History?

Past borrowing behavior reported by bureaus.

What is the Gross Debt Service Ratio (GDSR)?

% of gross income used for housing costs (max ~35%).

What is the Total Debt Service Ratio (TDSR)?

% of gross income used for all debt (max ~40%).

What percentage of households are in debt?

About 60%.

How many Canadians must liquidate assets to reduce debt?

1 in 5.

What is the purpose of financial services?

Manage money, savings, transactions, and financing.

What is a savings account best for?

Liquidity, safety, earning interest.

What is a time deposit (CD)?

Fixed-term deposit with higher interest, limited access.

What should you compare when choosing a financial institution?

Fees, interest rates, convenience, digital services.

How do interest rates affect borrowing?

Higher rates increase borrowing cost.

How does inflation affect savings?

Reduces purchasing power.

Credit utilization: what is it?

• Percentage of available credit currently used

• high utilization can lower credit score

GDSR formula?

GDSR (%) = (Mortgage Principal + Interest + Taxes + Heat) ÷ Gross Annual Income × 100

TDSR formula?

TDSR (%) = (Mortgage + Other Debt Payments) ÷ Gross Annual Income × 100

What would indicate low Capacity?

• High debt-to-income ratio

• unstable income

• suggesting difficulty repaying loans

Why does Capital matter to lenders?

It shows the borrower has assets to cover debt if income stops.

Give an example of Collateral for a loan.

A house pledged for a mortgage or a car for an auto loan.

How does Collateral affect interest rates?

Secured loans (with collateral) often have lower interest rates because risk is lower for the lender.

What actions improve your Credit History?

• On-time payments

• keeping balances low

• avoiding excessive new credit applications

How does a poor Credit History affect loan approval?

Can lead to higher interest rates or rejection due to perceived higher risk.

What do debt-to-income ratios measure?

The percentage of income used to pay debt; helps assess borrowing capacity.