Published on November 20th, 2009 | by Canadian Credit Expert1
Types of Credit in Canada – Installment & Revolving
The Different Types of Credit
In Canada the most common types of loans, such as car loans, credit cards or mortgages, fit into one of two types of credit. The two main types of credit in Canada are:
Installment Credit and Revolving Credit.
Installment credit in Canada is mostly made up of car loans, personal loans, mortgages and other loans that are connected to a specific item such as new home, new car or farm equipment.
Canadian installment loans are based on a fixed payment or installment. For example, a car loan traditionally has a regular monthly payment with a fixed payment that never changes. Each payment owed is considered an installment.
In Canada revolving credit is a type of trade line that comes with a specified credit limit. The credit limit of a revolving loan allows the borrower to spend their credit freely on whatever they want. This usually includes credit cards, personal line of credit and retail credit cards (Visa, Master card, Future shop credit card and Canadian Tire credit cards are good examples of revolving credit in Canada)
Unlike an installment loan a revolving loan does not have a fixed payment. Instead the payment “revolves” around the balance of the loan. A common type of revolving loan in Canada is the credit card.
In Canada each time you purchase something with your credit card you are using a portion of your credit limit and adding to the balance of your credit card. The size of credit card payment you owe each month is based on that balance. The higher the balance on your credit card, the bigger the payment you owe.
For most credit cards in Canada you are required to pay a minimum monthly payment of 3% of the credit card balance. Because credit cards are open loans, you can opt to pay off more than 3% each month.
While both installment and revolving loans are important to your credit history and credit score, there are still differences in how they report to your credit bureau and how they impact your credit score.
Installment Loans on Your Credit Bureau
On a consumer credit report in Canada an installment trade line is marked by an I. If an active installment loan is reporting properly, it will be marked with an I and a status ranging from 0 – 9 each month. For more information on credit reporting statuses see our Types of Bad Credit article or visit Check Your Credit First Canada.
Installment loans are usually big ticket items such as a car loan or mortgage. This generally results in larger payments. Because of this, most banks or finance companies consider installment loans to have more bearing on an individuals credit score. Each bank has their own set off credit guidelines and uses their own credit scoring system. Because of this the emphasis placed on different types of credit can still vary.
Revolving Loans on Your Credit Bureau
Revolving loans report to the credit bureau and are marked with an R. Just liked installment loans, the R on an active revolving loan will be accompanied by a monthly credit status.
A majority of Canadians have credit cards that report to their credit bureau every month and although they are usually smaller in size than most installment loans, they still affect your credit score considerable.
Large credit card limits and balances have a higher impact on your credit score than smaller credit card balances and limits. For example a $20,000 limit on a Mastercard indicates that Mastercard considered the consumer to have a strong enough credit score and income level to support such a limit.
On the flip side, if that same credit card consistently has a high or maxed out balance then it can be perceived as a bad thing and actually hurt the individuals credit score.
Examples of Installment Loans VS Revolving Loans
A VISA Card with a $500 limit is scored by the credit bureau just like any other loan but if you put it up against a $500 a month car loan, it almost seems trivial. That example basically sums up the differences between installment loans and revolving loans.
There are exceptions but for the most part installment loans are larger loans, with bigger payments that have a greater impact on your credit history.
Bad Credit Revolving Loans
Being a few days late on your credit card payment will not hurt your credit score in Canada. Being 30 or more days late will. A few slow credit card payments (30+ days late) is not considered very bad credit but it will definitely make a bank do a double take. If you’re applying for a mortgage or car loan and your credit is good with the exception of a few credit card slows in your past, then you should be ok. If however you have limited credit combined with slow credit card payments, then you might find your declined and looking for a high interest loan.
The worst case bad credit scenario for a credit card or installment loan is the “write off”. Because a revolving trade line is not secured against an asset (like an auto loan is secured against a vehicle), the lender usually has no repossession recourse. Since the creditor has no option of repossession a vehicle or seizing back a house, the only option they have at default is to write off the balance of the loan.
Bad Credit Installment Loans
Any bad credit history affects your credit score and approval chances but having a bad credit installment loan, is especially detrimental to your credit. While its important to note that missing credit card or revolving loan payments is always a bad thing, it is usually less damaging than missing a car payment.
There are also other dangers to defaulting on installment loans – losing your assets. If you financed the vehicle you are driving and you begin missing payments or making late payments you run the risk of auto loan repossession. Having a car loan repo on your credit history is very damaging to your credit.
While it is possible to get approved for a new car loan after a repo, it will not be a low interest loan. There are, under the right circumstances, subprime auto lenders that can approve you after a repossession but the interest rate will be high and in some cases your vehicle might have a GPS locator installed in it. For more information about auto loan repossession or getting approved for car loan after repo, check out our Repo article.
Applying for Credit
The most important thing to consider when applying for credit with any type of credit history is your previous experience with that type of loan. For example, if you’re applying for a car loan then you’re applying for an installment loan. That means any installment history you have on your credit bureau is sure to highly considered. This is especially true when applying for a bad credit car loan. Most sub prime or special finance auto lenders opt out of using a computer to make their decisions and instead have a credit analyst review each application.
If you have a bad credit card history but a decent history of paying your installment loans on time, then the underwriter might consider you for a car loan based solely on your installment history.
The same goes for revolving trade lines. If you have an excellent credit cards history but a few problems paying your students loans on time or a car loan, it will be easier to get another credit opposed to another student loan or auto loan.