Credit means buying something now and paying later.
That can be helpful — but it is also risky.
When you use credit, you are making an assumption about the future. You are assuming you will have the income, stability, and discipline to repay what you borrowed.
After a bankruptcy or consumer proposal, it’s especially important to approach credit carefully.
- First, you’ve filed insolvency to eliminate problem debt. The last thing you want is to build up too much debt again.
- Second, you want to use credit wisely so that your credit score improves over time. That way if you need more credit in the future you will have access, at a reasonable interest rate.
The Benefits of Credit (When Used Properly)
Used responsibly, credit can offer:
- Convenience (not carrying large amounts of cash)
- Rewards or points programs
- Immediate access to needed goods or services
- A safety backup in emergencies
Credit itself is not the problem. Misusing it is.
The Risks of Credit
If not managed carefully, credit can lead to:
- Loss of financial flexibility
- Higher costs for everything you buy on credit if you have to pay interest charges
- Overspending (it’s easier to swipe than to count cash)
- Future debt problems
- Increased stress and anxiety
Interest makes everything more expensive. A $500 purchase can cost much more if it takes months or years to repay.
Practical Rules for Using Credit Wisely
- Do not use credit for everyday living. If you need credit for groceries or gas, your spending plan needs adjustment.
- Pay your balance in full each month. Minimum payments keep you in debt for years and cost thousands in interest.
- Avoid payday loans completely. Payday loans are extremely expensive and can trap you in a cycle of repeat borrowing.
- Never use debt to pay debt. Using one credit product to cover another only makes the problem worse.
- Be cautious about co-signing. If the other person cannot pay, you are fully responsible for the entire debt.
- Borrow less than you are approved for. Lenders approve maximum amounts, not what is safest for your budget.
- Build a down payment before borrowing. A larger down payment lowers your monthly payments and reduces financial pressure.
- Treat credit as a payment method, not extra income. Credit should support your plan, not replace your income.
If you are worried your habits are sliding back, read our article on warning signs of too much credit.
If you are ready to get a credit card, see our article on getting a new credit card.