Understanding Credit Types in Canada
The Canadian credit system offers a variety of products distinguished by their repayment structure and the level of collateral required. For the mortgage borrower, understanding these distinctions is essential because each credit type affects the credit score differently, as well as debt service ratios (GDS and TDS under OSFI's B-20 guidelines) and, ultimately, the ability to qualify for mortgage financing. AMF-certified mortgage brokers in Quebec must master these concepts to guide clients toward a balanced and optimized credit portfolio.
Revolving Credit vs Instalment Credit
- Revolving credit
- A credit product offering a reusable limit. Each repayment frees up available credit for new use. Examples: credit card, personal line of credit, home equity line of credit (HELOC). Minimum payments vary based on the balance used, typically 2% to 3% of the balance or a fixed minimum amount.
- Instalment credit
- A credit product involving a fixed amount borrowed and repaid in regular payments over a set period. Examples: personal loan, auto loan, student loan, mortgage. Payments are fixed and predictable. Once repaid, the credit is no longer available.
On the credit file, revolving accounts carry the code R (R1 to R9 based on payment history) and instalment accounts carry the code I (I1 to I9). Mortgage accounts have their own code M. A credit file with only revolving accounts is considered less diversified than a file including both revolving and instalment credit. Credit mix diversity accounts for approximately 10% of the scoring algorithm at Equifax and TransUnion.
Secured vs Unsecured Credit
The second fundamental distinction concerns collateral. Secured credit is backed by an asset that the lender can seize in case of default. The mortgage, governed in Quebec by articles 2660 and following of the Civil Code of Quebec (CCQ), is the quintessential secured credit: the real property serves as security. An auto loan secured by the vehicle, a secured credit card backed by a cash deposit, and a home equity line of credit secured by the residence are other common examples. Unsecured credit relies solely on the borrower's promise to repay and their creditworthiness as assessed by the lender. Classic credit cards, unsecured personal loans, and personal lines of credit are examples of unsecured credit. Rates are significantly higher to compensate for the lender's increased risk.
Credit Type Comparison
- Classic credit card: revolving, unsecured, rate 19% to 29%, R code on file, minimum payment 2-3% of balance.
- Secured credit card: revolving, secured by deposit, rate 15% to 21%, R code on file, ideal for credit rebuilding.
- Personal line of credit: revolving, unsecured, rate prime + 2% to prime + 6%, R code on file, interest-only or minimum monthly payment.
- Home equity line of credit (HELOC): revolving, secured by property, rate prime + 0.5% to prime + 1%, R code on file, maximum limit 65% of property value per OSFI.
- Personal loan: instalment, secured or unsecured, rate 7% to 15% (unsecured) or 5% to 10% (secured), I code on file.
- Auto loan: instalment, secured by vehicle, rate 5% to 12%, I code on file, impacts TDS ratio.
- Mortgage: instalment, secured by property, rate 4% to 8% depending on market, M code on file, regulated by OSFI and CMHC.
The AMF-certified mortgage broker must help clients understand how each credit type in their portfolio affects their qualification. A balanced portfolio comprising well-managed revolving credit (utilization under 30%), regularly repaid instalment credit, and a diversified history optimizes the chances of obtaining the best mortgage rates. The LDPSF requires the broker to provide advice tailored to each client's individual situation, which includes a thorough understanding of their credit composition.